OSM5032 - MODULE 2

REVISION QUESTIONS
Dr. Moffat TEMBO

MCQs: Types of Contracts in Procurement

1. Which contract type transfers most cost risk to the contractor?

A. Cost-plus contract
B. Time and materials contract
C. Fixed-price contract
D. Framework agreement
✅ Answer: C. Fixed-price contract
Explanation: Fixed-price contracts assign most financial risk to the contractor, especially
when scope is clearly defined.

2. A unit rate contract is best suited when:

A. Final quantities are unknown but unit pricing is possible
B. The design is not ready
C. The buyer wants flexibility on scope
D. The contract needs to include a service level agreement
✅ Answer: A. Final quantities are unknown but unit pricing is possible

3. Which of the following is not a characteristic of lump sum contracts?

A. Defined total cost
B. Variable final payment based on measurement
C. Used for well-defined projects
D. Low administrative oversight
✅ Answer: B. Variable final payment based on measurement

4. Which contract type is most appropriate during emergency infrastructure repair where
design is incomplete?
A. Lump sum
B. Unit rate
C. Cost-reimbursable

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D. BOT
✅ Answer: C. Cost-reimbursable

5. What is the main disadvantage of a cost-plus-percentage-of-cost (CPPC) contract?

A. Difficulty in mobilization
B. Encourages cost control
C. Reduces contractor profits
D. Incentivizes cost inflation
✅ Answer: D. Incentivizes cost inflation

6. Which of the following contracts enables early mobilization but demands strong
monitoring systems?
A. Lump sum
B. Framework agreement
C. Cost-plus-fixed-fee
D. T&M contract
✅ Answer: D. T&M contract

7. A framework agreement differs from traditional contracts because it:

A. Commits to a fixed quantity
B. Involves long-term operations
C. Requires mini-competitions or call-offs
D. Requires formal concession agreements
✅ Answer: C. Requires mini-competitions or call-offs

8. SLAs are most appropriate in:

A. One-time construction projects
B. Procurement of raw materials
C. Outsourced cleaning services
D. Land acquisition agreements
✅ Answer: C. Outsourced cleaning services

9. The Build-Operate-Transfer (BOT) model requires the private sector to:

A. Only finance the project
B. Operate the project but not build it
C. Design, finance, construct, operate, then transfer
D. Construct and transfer without operation
✅ Answer: C. Design, finance, construct, operate, then transfer

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10. A Cost-Plus-Fixed-Fee (CPFF) contract:
A. Pays the contractor a variable fee
B. Includes service-level guarantees
C. Pays a fixed fee in addition to reimbursable costs
D. Is preferred in stable market conditions
✅ Answer: C. Pays a fixed fee in addition to reimbursable costs

11. Which contract type is ideal when procurement must be done repetitively over time
across different locations?
A. SLA
B. Framework agreement
C. CPPC
D. DBFO
✅ Answer: B. Framework agreement

12. What is a key advantage of a PPP model?

A. Allows indefinite contract terms
B. Transfers design and operating risks to the public
C. Enables access to private capital and innovation
D. Limits contractor flexibility
✅ Answer: C. Enables access to private capital and innovation

13. In a Time & Materials contract, cost control is mainly ensured through:
A. Subcontracting
B. Lump sum payments
C. NTE clauses and time logs
D. Service credits
✅ Answer: C. NTE clauses and time logs

14. Which of the following contract types allows the contractor to propose the best solution
rather than follow strict instructions?
A. Lump sum
B. SLA
C. CPFF
D. BOT
✅ Answer: B. SLA

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15. One of the main risks with fixed-price contracts in volatile markets is:
A. Underutilization of capacity
B. Exchange rate variation
C. Overdesign
D. Cost certainty
✅ Answer: B. Exchange rate variation

16. Which model is most commonly used in toll roads and independent power projects in
Zambia?
A. CPPC
B. DBFO
C. SLA
D. BOO
✅ Answer: B. DBFO

17. The key difference between BOO and BOT models is:
A. BOO involves public ownership
B. BOT includes asset transfer to the public
C. BOT is longer in duration
D. BOO requires public subsidies
✅ Answer: B. BOT includes asset transfer to the public

18. What is a key benefit of service-level agreements in contract enforcement?

A. They encourage unit rate pricing
B. They reduce need for reporting
C. They provide measurable performance thresholds
D. They eliminate cost overruns
✅ Answer: C. They provide measurable performance thresholds

19. What is a common penalty in SLAs when providers underperform?

A. Additional mobilization costs
B. Lump sum re-negotiation
C. Service credits or fee reductions
D. Term extension
✅ Answer: C. Service credits or fee reductions

20. When the scope is exploratory and the buyer needs flexibility, which contract type is most
appropriate?
A. Lump sum

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B. CPIF
C. T&M
D. BOT
✅ Answer: C. T&M

Long Answer Questions with Answers

1. Explain the characteristics of a fixed-price contract and discuss its advantages and
limitations in public infrastructure projects.

Answer:
A fixed-price contract specifies a lump sum or unit rate for the completion of a clearly
defined scope of work. The contractor assumes most of the cost risk, meaning they must
deliver the agreed results within the fixed budget regardless of actual costs incurred.

Advantages:

 Predictable budgeting for the client

 Simplified administration and payment
 Encourages contractor efficiency and cost control

Limitations:

 Inflexible in cases of scope change or market volatility

 Can lead to disputes over variations
 May encourage underpricing and quality compromises

Fixed-price contracts are suitable for projects with stable market conditions and well-defined
scopes, such as road resurfacing or school construction.

2. Differentiate between cost-plus-fixed-fee (CPFF), cost-plus-incentive-fee (CPIF), and

cost-plus-percentage-of-cost (CPPC) contracts. Include the risks and uses of each.

Answer:

 CPFF: The contractor is reimbursed for allowable costs plus a pre-agreed fixed fee.
Common in R&D and design works. Minimal cost control risk for contractor.
 CPIF: Similar to CPFF, but includes performance incentives. Balances cost risk and
encourages efficiency.
 CPPC: Contractor is paid all costs plus a percentage markup. Discourages cost
control, as profit increases with higher costs—generally avoided in public
procurement.

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Risks:

 CPFF/CPIF: Requires strong monitoring; cost risk stays with client.

 CPPC: High abuse risk; banned in many public procurement systems.

Used where scope is evolving, such as emergency reconstruction, or where early contractor
involvement is essential.

3. Discuss the conditions under which a Time and Materials (T&M) contract would be
appropriate. Include cost control strategies.

Answer:
T&M contracts pay the contractor for actual labor hours and materials used. Appropriate
when:

 Work scope cannot be precisely defined

 Projects are urgent, iterative, or reactive (e.g., maintenance)

Cost control strategies include:

 Pre-approved hourly rates

 “Not-to-exceed” (NTE) ceilings
 Daily logs and material tracking
 Frequent reporting and audits

These contracts offer flexibility but require rigorous oversight to prevent cost escalation.

4. Describe the structure and application of a framework agreement. How does it

support procurement efficiency?

Answer:
A framework agreement is an umbrella contract with one or more prequalified suppliers,
enabling call-off contracts over a defined period without committing to quantity upfront.

Structure:

 No guaranteed volumes
 Allows mini-competitions or direct orders
 Often valid for 1–4 years

Benefits:

 Speeds up procurement for repetitive goods/services

 Reduces administrative workload
 Enhances supply security during emergencies

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Common in procurement of routine items like office supplies, fuel, or minor works.

5. Define Service Level Agreements (SLAs) and explain their role in performance-based
contracting. Provide examples.

Answer:
SLAs are contractual clauses that specify the required level of service performance and
define penalties or incentives for meeting—or failing—performance standards.

Key SLA elements:

 Response times (e.g., <4 hours)

 Completion targets (e.g., repair in 24 hrs)
 Uptime requirements (e.g., 99.9%)
 Customer satisfaction thresholds

Examples:

 IT maintenance services
 Janitorial contracts in hospitals

SLAs foster accountability, improve transparency, and support continuous service

improvement.

6. Compare and contrast Public-Private Partnership (PPP) models including BOT,

BOO, and DBFO. Highlight ownership and risk aspects.

Answer:

 BOT (Build-Operate-Transfer): Private entity designs, builds, operates the asset,

then transfers it to government. Public regains ownership post-operation.
 BOO (Build-Own-Operate): Private entity retains ownership and operational control
indefinitely.
 DBFO (Design-Build-Finance-Operate): Full-cycle delivery by the private sector,
with the government acting as off-taker over a long-term contract.

Risk transfer:

 Design, construction, finance, and operational risk is shifted to private partner.

 BOT and DBFO return ownership; BOO retains it.

Suitable for toll roads, energy plants, and water systems.

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7. Identify factors to consider when selecting an appropriate contract type in
procurement. Provide real-world examples.

Answer:
Factors include:

 Scope definition: Fixed-price for defined, stable scope; T&M for vague or evolving
works.
 Risk allocation: Choose based on which party can best manage risk.
 Market conditions: Stable prices support fixed pricing; volatile conditions suit CPFF
or T&M.
 Project urgency: Emergency or fast-track projects require flexible contracts.
 Performance requirements: SLAs and KPIs are critical for service contracts.

Example:

 For housing development with defined specs, use fixed-price.

 For COVID-19 health response, use cost-reimbursable or T&M with caps.

8. What are the risks and benefits of the BOT model in infrastructure procurement?
Illustrate with examples.

Answer:
Benefits:

 Mobilizes private finance and expertise

 Shifts lifecycle cost risk to the operator
 Reduces upfront government investment

Risks:

 Long-term revenue uncertainty

 Regulatory or political interference
 Complexity in contract enforcement

Example: Zambia’s road tolling systems under PPP models. Government benefits from
modern infrastructure while deferring capital costs, but must ensure traffic projections and
fee collection are realistic.

9. Explain how price adjustment clauses support contract sustainability in long-term

fixed-price contracts.

Answer:
Price adjustment clauses allow for variation in contract price in response to predefined
triggers such as:

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  Inflation (consumer or construction index-linked)
 Currency exchange fluctuations
 Commodity price volatility

Benefits:

 Protects contractors from external shocks

 Reduces need for contract renegotiation
 Supports fair risk-sharing

Common in contracts exceeding 12 months or involving imported materials.

10. Discuss why CPPC contracts are discouraged in public procurement. What
alternatives are available that still offer flexibility?

Answer:
CPPC (Cost-Plus-Percentage-of-Cost) contracts incentivize higher spending, since
contractor profit increases with costs. This creates:

 Misaligned incentives
 Cost inefficiencies
 Budget overruns
 Audit and accountability risks

Alternatives:

 Cost-Plus-Fixed-Fee (CPFF): Pays actual cost + fixed fee regardless of total value.
 T&M with ceiling price: Limits overexpenditure while allowing scope flexibility.
 Framework contracts with rate caps: For repeat or uncertain work packages.

Public procurement laws often ban CPPC to protect public funds.