Project Management Professional (PMP) Practice Exam

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Study for the Project Management Professional (PMP) exam. Study with flashcards and multiple choice questions. With over 500 questions. Practice the PMP practice multiple choice questions. Updated for 2023-2025. Get ready for your exam!

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The sales representative of your company recently contacted you. You made some estimates on direct costs for an offer on a firm fixed-price contract. According to company policies, indirect costs (overheads) are to be calculated as a percentage of the direct costs, the sum of both cost types caused him to calculate a far too high price. How should you not react?

You reduce your direct cost estimates by reducing the amount of work and the rates allocated to them. This allows a reduction of the overhead costs and a lower price.
Calculating overheads as a percentage of direct costs is just a model to simplify calculations. A more specific analysis of these costs may lead to a more realistic project price.
Cost estimates are quantitative assessments of the probable costs required to complete project work. These are made by the project team. It is the sales person’s job to make the price.
You make the sales person aware that a reduction of direct costs may reduce the numbers for overhead cost allocation, but will not influence the actual overheads.

The correct answer is: You reduce your direct cost estimates by reducing the amount of work and the rates allocated to them. This allows a reduction of the overhead costs and a lower price.

The answer A is correct because reducing your direct cost estimates will also lower the overhead costs and ultimately result in a more reasonable project price. Option B is incorrect because while analyzing costs can lead to a more accurate price, it may not necessarily address the issue of high overhead costs due to the fixed percentage calculation. Option C is incorrect because cost estimates are not solely the responsibility of the project team, and the sales person has a role in determining the price. Option D is incorrect because while a reduction in direct costs may affect overhead cost allocation, it will not directly lower the actual overhead costs. It is important to address the issue of high overhead costs in order to provide a more competitive and realistic project price.