In a cost-plus-fee contract, the contractor is reimbursed for all legitimate project costs plus a predetermined fee. What is the primary risk for the owner in this contract type?
Correct Answer
B) The final project cost is not guaranteed and could exceed budget
In cost-plus contracts, the owner bears the risk of cost overruns since they pay all actual costs plus the fee. The final project cost is not fixed and can exceed the original budget estimate.
Why This Is the Correct Answer
In cost-plus-fee contracts, the owner agrees to reimburse the contractor for all legitimate project expenses plus pay a predetermined fee for the contractor's services. This structure means the owner has no cost ceiling or guarantee, making them financially responsible for any cost increases during construction. Unlike fixed-price contracts where the contractor absorbs cost overruns, cost-plus contracts transfer this financial risk entirely to the owner. The primary concern for owners is budget uncertainty since final costs depend on actual expenses incurred during construction.
Why the Other Options Are Wrong
Option A: The contractor may not complete the work on time
While schedule delays can occur in any contract type, this is not the primary risk specific to cost-plus contracts. Schedule risk exists in all contract structures and is not the defining characteristic that makes cost-plus contracts risky for owners.
Option C: The contractor bears all cost overrun risks
This statement is incorrect because in cost-plus contracts, the owner bears the cost overrun risks, not the contractor. The contractor is reimbursed for all legitimate costs regardless of whether they exceed original estimates, making this the opposite of the actual risk distribution.
Option D: The quality of work may be compromised
Quality concerns can exist in any contract type and are not the primary risk specific to cost-plus arrangements. Quality is typically managed through specifications, inspections, and contract terms rather than being directly related to the cost reimbursement structure.
Memory Technique
Think 'PLUS = Problem for owner's pUrse, Limitless Spending' - the 'plus' in cost-plus means potentially unlimited costs for the owner.
Reference Hint
Look up contract types and risk allocation in the Business and Finance Management section, typically Chapter 4 or 5 covering contract administration and project delivery methods.
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