How do you decide which contract type to use with a vendor?
What the interviewer wants to hear
- Depends on how well scope is defined
- Fixed price when scope is clear; seller carries cost risk
- Cost-reimbursable when scope is uncertain; buyer carries more risk
- Time and materials for small or staff augmentation work with caps
- Consider incentives, oversight capacity and relationship
- Involve procurement and legal
Model answer
The main factor is how well we can define the scope. If the scope is clear and stable, a fixed price contract makes sense because the seller carries the cost risk, though they will price that risk in and changes become formal. If the scope is uncertain, such as research or a new technology, a cost-reimbursable contract like cost plus fixed fee or cost plus incentive fee is more realistic, but we need strong oversight because we carry more risk. For staff augmentation or small, unclear work, time and materials works well with a not-to-exceed cap. Incentive fees help align the vendor with our goals, such as finishing early or under cost. I also consider how much capacity we have to manage the vendor and the long-term relationship. I always involve procurement and legal, and make sure the statement of work is clear.
Can you answer it under time pressure?
Take a timed medium round and get scored on every answer.
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