Deck 15: Methods of Compensation

Question 1

Contract schedule risk is the risk associated with material and labor cost increases and possible schedule slippages.

Answer 1

True

Question 2

Three general types of contract compensation arrangements were presented in the textbook: fixed price contracts,incentive contracts and cost-type contracts.

Answer 2

True

Question 3

A firm fixed price (FFP)contract is an agreement to pay a specified price when the items (services)specified by the contract have been delivered (completed)and accepted.

Answer 3

True

Question 4

The target profit is an amount the buyer hopes to make.

Question 5

Three general types of contract compensation arrangements were presented in the textbook: fixed price contracts,buyer's favor contracts and supplier's favor contracts.

Question 6

The target cost is the cost outcome both buyer and supplier feel is the most likely outcome.

Question 7

Cost Plus Incentive Fee arrangements combine the incentive arrangement and the cost plus fixed fee arrangement.

Question 8

Under a CPIF arrangement,an incentive applies over the entire range of cost outcomes.

Question 9

Common types of FFP contracts are: firm fixed price,fixed price with economic price adjustment and fixed price redemption.

Question 10

Cost Plus Incentive Fee arrangements combine the incentive arrangement and the FFP arrangement.

Question 11

FPEPA is not similar to an FFP contract.

Question 12

Under a CPIF arrangement,an incentive applies over part of the range of cost outcomes.The fee structure resembles a cost plus fixed fee contract at both the low-cost and high-cost ends of the range.

Question 13

Contract schedule risk is the risk associated with possible schedule slippages,but not the risk of material and labor cost increases during the length of the contract.

Question 14

FPEPA is an FFP contract that includes economic price adjustment clauses such as escalator clauses are for price increases and de-escalator clauses are for price decreases.

Question 15

FPEPA contracts are used to recognize economic contingencies,such as unstable labor or market conditions.

Question 16

A firm fixed price (FFP)contract is an agreement to pay a price that varies depending on when the items (services)specified by the contract have been delivered (completed)and accepted.

Question 17

The target cost is the best-case scenario for the buyer.

Question 18

Common types of FFP contracts are: firm fixed price,fixed price with economic price adjustment and fixed price redetermination.

Question 19

FPEPA contracts are used to recognize hidden cost contingencies,such as poor quality or late delivery.

Question 20

The target profit is an amount considered fair and reasonable by both parties.

Question 21

A supplier that is under an FFP contract may end up losing money and request relief.Which of the following reasons is why the customer will allow changing the price?

A) Customer did not contributed to the loss
B) Customer does not need the items
C) Customer assumes no other suppliers are available
D) Supplier has facilities that are not unique
E) There is plenty of time to find a new supplier

Question 22

Which of the following statements is not true about incentive arrangements in contracts?

A) Used to motivate the supplier to control costs
B) Used to encourage good supplier performance
C) Contract price will usually be lower
D) Ceiling price is usually fixed during negotiations
E) Cost responsibility is usually shared

Question 23

Which of the following is not a criterion in favor of using cost-type arrangements?

A) Research and development increases technical risk
B) Project completion is in doubt
C) Product specifications are incomplete
D) Delivery times are certain
E) High-dollar, highly uncertain procurements are involved

Question 24

Which of the following is generally not a consideration that should impact the type of contract supply management decides to choose?

A) Improvement in production is required
B) Complexity of product or service
C) Product or service requires development
D) Desire of marketing to engage in reciprocity
E) Design is not completed or may change

Question 25

Which of the following is not typical of a cost without fee arrangement?

A) Used primarily by nonprofit institutions
B) Used for research work
C) The objective is to only make a small profit
D) Institutions generally recover all overhead costs when using this type of contract
E) In recent years, high-technology firms have increased their use of this contract type

Question 26

Which of the following is not typical of a CPAF arrangement?

A) The award fee is a pool of money established by the buyer
B) The award fee is a pool of money to reward the supplier in meeting the buyer's stated needs
C) Receipt of the fee is based on the buying firm's objective evaluation
D) Receipt of the fee is based on the buying firm's subjective evaluation
E) The arrangement works as a flexible tool

Question 27

Which of the following is not typical of a CPFF arrangement?

A) Buying firm pays a fixed fee and all costs beyond fee
B) Fee is for an unlimited scope of work
C) Supplier has no incentive to control costs
D) Characterized by low supplier profit
E) A total liability limit is usually established

Question 28

Which is not one of the criteria given in the textbook to determine whether using an FFP type contract is feasible?

A) Specifications are well defined
B) Cost risk is high
C) Schedule risk is low
D) Technical risk is low
E) Competition has established pricing

Question 29

Which of the following is not true with respect to fixed price redetermination contracts (FPR)?

A) A FFP is set for an initial period of the contract
B) A redetermination (upward or downward) occurs at a stated time during the contract
C) FPR prospective almost always occurs at the middle point in time of the contract
D) FPR prospective is used where a fair and reasonable price can be developed for initial periods but not subsequent periods
E) FPR Retroactive is used when uncertainty exists as in the prospective, but the amount of the contract is small and/or the performance period is short

Question 30

Which of the following is not a cost type arrangement?

A) Cost reimbursement
B) Cost without fee
C) Cost sharing
D) Time and materials
E) Materials and machine

Question 31

Which of the following is not a cost type arrangement?

A) Cost reimbursement
B) Cost plus hidden charges
C) Cost plus fixed fee
D) Cost plus award fee
E) Cost without fee

Question 32

Which of the following is generally not a consideration that should impact the type of contract supply management decides to choose?

A) Unstable labor conditions
B) Enforcement problems
C) Unstable market conditions
D) Improvement in production is required
E) Complexity of product or service

Question 33

Which is not one of considerations in assessing technical risk as presented in the textbook?"

A) Type and complexity of the item or service
B) Supply and demand patterns of the marketplace
C) Stability of design specifications or statement of work
D) Availability of historical pricing data
E) Prior production experience

Question 34

The compensation arrangement determines:

A) Degree and timing of the cost responsibility assumed by the supplier
B) Amount of profit or fee available to the supplier
C) Capability of the supplier with respect to quality
D) Motivational implications of the fee portion of the compensation arrangements

Question 35

Which is not one of the rules given in the textbook for selecting indexes for price adjustment clauses?

A) Use broad indexes
B) Develop a weighted index for materials in a product
C) Select labor rate indexes by type and location
D) Define energy indexes by fuel type and location
E) Analyze the past history of each index versus actual price change of the item being indexed