Certified Supply Chain Professional (CSCP) Practice Exam

In a firm fixed price contract, how is the seller compensated?

1. Based on actual costs incurred plus a fixed fee

2. By a set price without consideration of incurred costs

3. Through a combination of performance bonuses and fixed fees

4. Only if specific contract conditions are achieved

The correct answer is: By a set price without consideration of incurred costs

In a firm fixed price contract, the seller is compensated by a set price without consideration of incurred costs. This type of contract establishes a predetermined price for the goods or services provided, meaning that the seller agrees to complete the project or deliver the product for that fixed amount, regardless of the actual costs incurred during the execution of the contract. This arrangement incentivizes the seller to manage costs effectively, as they assume the risk of any cost overruns beyond the agreed fixed price. If expenses exceed the fixed price, the seller must absorb those additional costs. Conversely, if costs are less than the agreed price, the seller retains the profit margin. This structure promotes efficiency and can lead to cost savings, benefiting both the seller and the buyer under certain conditions. In contrast, the other options suggest alternative compensation structures that do not align with the definition of a firm fixed price contract. For example, cost-plus agreements would involve compensation based on actual costs plus a fee, and performance bonuses would imply a variable compensation structure, which deviates from the fixed price principle.