Cost Plus Fixed Fee (CPFF)
A Cost Plus Fixed Fee (CPFF) contract works very differently from a fixed price deal. Here the buyer agrees to reimburse (pay back) the seller for all the legitimate costs of doing the work, and then also pays the seller an extra fixed fee on top. That fee is the seller's profit, and it is set as a firm dollar amount agreed in advance.
The key point is that the fixed fee stays the same no matter what the final costs turn out to be. If the work costs more than expected, the buyer still covers those costs and pays the same fee. This means the buyer carries the cost risk — the opposite of a fixed price contract, where the seller carries it.
To read this arrangement, remember the seller's profit (the fee) is locked, so they don't gain by overspending, but they also aren't strongly rewarded for saving money. A project manager chooses CPFF when the scope of work is unclear or hard to estimate up front — for example, research or exploratory projects — where asking a seller to commit to a fixed price would be unfair or impossible.
Think of it like hiring a contractor to renovate a room where nobody knows what's behind the walls yet. You promise to cover whatever materials and labor turn out to be needed, plus a flat set fee for their trouble — so they'll take the job even though the true cost is a mystery.
Imagine you hire a lab to run an experimental study. You agree to reimburse all their costs plus a fixed fee of $20,000 as their profit. If their actual costs come to $120,000, you pay $120,000 + $20,000 = $140,000 total. If costs instead reach $150,000, you pay $150,000 + $20,000 = $170,000 — the fee stays at $20,000 either way. The seller's profit never changes; only the reimbursed costs move.
Every PMP formula explained free — plus worked examples and practice in PMP Math, and full timed mocks in the simulator.