Contracts & ExecutionQuestion 824 of 1605
Which contract type places the greatest risk of cost overruns on the contractor rather than the owner?
a.Fixed-price (lump-sum)
b.Time-and-materials
c.Straight cost-plus-percentage
d.Cost-plus with no maximum
Explanation
A fixed-price or lump-sum contract puts the greatest cost-overrun risk on the contractor because the price is set regardless of actual costs; if costs exceed the estimate, the contractor absorbs the loss. Cost-plus and time-and-materials arrangements shift much of that risk to the owner, who reimburses actual costs. This is why accurate estimating and scope control are critical to profitability on fixed-price work.
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Related questions on this topic
- A 'cost-plus with a guaranteed maximum price (GMP)' contract protects the owner by:
- A unit-price contract is most appropriate when:
- In a time-and-materials (T&M) contract, the contractor is compensated based on:
- A liquidated damages clause in a construction contract is best described as:
- For a liquidated damages clause to be enforceable rather than struck down as a penalty, courts generally require that:
- A contract states, 'Liquidated damages of $500 per day shall apply for each day completion is late beyond the substantial completion date.' If the contractor finishes 10 days late, the owner's presumptive recovery under a valid clause is:
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Reviewed by Abraham Chen — Licensed California General Contractor (CSLB License #1101856 — verify)