An agreement that calls for a contractor to be paid actual costs for labor and materials plus a fixed fee for the contractor's overhead and profit is called a

An agreement that calls for a contractor to be paid actual costs for labor and materials plus a fixed fee for the contractor's overhead and profit is called a

• A. cost plus contract.
• B. lump-sum contract.
• C. time and materials contract.
• D. unit price contract.

Answer: (A)

This question tests understanding of a payment structure where the contractor is reimbursed for actual labor and material costs plus a fixed fee for overhead and profit. That arrangement is called a cost-plus contract. It’s used when the scope or costs are uncertain, so the owner covers the true expenses and guarantees the contractor a predetermined profit through the fixed fee. The fixed fee is agreed in advance and does not vary with the final cost, while total payment grows as actual costs rise. This differs from a lump-sum contract, where the total price is fixed upfront; from a time-and-materials contract, which pays for labor at set rates plus materials (often with a markup) rather than a separate fixed fee; and from a unit-price contract, which bases payment on quantities times unit prices rather than actual costs plus a fixed fee.

This question tests understanding of a payment structure where the contractor is reimbursed for actual labor and material costs plus a fixed fee for overhead and profit. That arrangement is called a cost-plus contract. It’s used when the scope or costs are uncertain, so the owner covers the true expenses and guarantees the contractor a predetermined profit through the fixed fee. The fixed fee is agreed in advance and does not vary with the final cost, while total payment grows as actual costs rise. This differs from a lump-sum contract, where the total price is fixed upfront; from a time-and-materials contract, which pays for labor at set rates plus materials (often with a markup) rather than a separate fixed fee; and from a unit-price contract, which bases payment on quantities times unit prices rather than actual costs plus a fixed fee.