PMI Risk Management Professional Practice Exam

Which method is an example of transferring a negative risk to a supplier?

1. Using a cost-reimbursable contract

2. Using a fixed-price contract

3. Using a reward-sharing contract

4. Having the supplier establish a contingency reserve

The correct answer is: Using a fixed-price contract

Transferring a negative risk to a supplier effectively means shifting the responsibility for certain risks away from your organization and onto another party, in this case, the supplier. A fixed-price contract is a compelling example of this method because it establishes a set price for the goods or services provided, regardless of the actual costs incurred by the supplier. In a fixed-price contract, the supplier assumes the risk of cost overruns or unexpected expenses. If the costs to fulfill the contract exceed the predetermined price, it is the supplier's responsibility to absorb those additional costs rather than your organization facing those financial risks. This arrangement provides clarity and predictability around expenditures, allowing your organization to maintain a more stable budget while transferring the associated risks of price fluctuations and cost management to the supplier. The other options do not inherently transfer negative risk to the supplier in the same direct manner. Cost-reimbursable contracts can increase your risk exposure as you may need to reimburse the supplier for all allowable costs, possibly leading to unexpected expenditures. Reward-sharing contracts focus on mutual benefits which may not adequately address risk transfer. Lastly, having the supplier establish a contingency reserve allows for some risk mitigation but does not fully shift the burden of risk away from your organization as effectively as a fixed-price contract