In a cost-plus-fee contract with a 8% fee, if actual project costs are $425,000, what is the total contract amount paid to the contractor?
Correct Answer
C) $459,000
In a cost-plus contract, the contractor receives reimbursement for actual costs plus the agreed fee. Total payment = $425,000 + ($425,000 × 0.08) = $425,000 + $34,000 = $459,000.
Why This Is the Correct Answer
In a cost-plus-fee contract, the contractor receives reimbursement for all actual project costs plus an additional fee percentage on top of those costs. The 8% fee is calculated as a percentage of the actual costs ($425,000 × 0.08 = $34,000), then added to the original costs. This compensation structure ensures the contractor covers all expenses and earns a profit margin, making the total payment $459,000.
Why the Other Options Are Wrong
Option A: $425,000
This amount ($442,500) would represent only about a 4.1% fee ($17,500), which is exactly half of the agreed 8% fee percentage.
Option B: $433,000
This represents only the actual project costs without including the contractor's 8% fee, which would leave the contractor with no profit margin.
Memory Technique
Think 'Cost-PLUS-fee' - the word 'plus' reminds you to ADD the fee percentage to the original costs, not replace them.
Reference Hint
Look up contract types and cost-plus contracts in the Business and Finance Management chapter, typically found in sections covering contractor compensation methods.
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