You are managing a government defense project operating under a Cost Plus Fixed Fee (CPFF) contract with a target cost of $8 million and a fixed fee of $800,000. At the 60% completion point, you discover that a subcontractor has been misclassifying certain labor costs as direct project costs when they should have been indirect overhead costs. The misclassification has inflated your actual costs by $400,000. The client's auditor has identified this issue and is demanding corrective action. The contract includes a clause limiting reimbursable costs to 115% of target cost. What is your most appropriate immediate action as project manager?

Question

Accepted Answer

The correct answer is A. Option A is correct because the immediate priority is to establish accurate project cost data by correcting the misclassification. In a CPFF contract, accurate cost reporting is legally and ethically required, and the project manager must first understand the true cost position before taking any other action. The $400,000 wasn't actually spent on the project as reported, so correcting the classification reveals the real cost performance and remaining budget. This enables informed decision-making about whether corrective actions are actually needed. Option B is the main distractor because it assumes the project is now $400,000 over budget, but this is incorrect—the costs were misclassified, not overspent. The project's true cost performance is actually better than reported, and implementing unnecessary corrective actions could negatively impact scope or quality. The cost ceiling of $9.2M (115% of $8M) may not even be threatened once accurate costs are known. Options C and D are premature because you need accurate data before requesting changes or pursuing claims. Additionally, the misclassification may have been an accounting error rather than a contractual breach requiring claims.

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