Which contract type places full responsibility for performance costs and resulting profit on the contractor?

Which contract type places full responsibility for performance costs and resulting profit on the contractor?

• A. Time-and-materials contracts place full responsibility on the contractor
• B. Incentive contracts place fixed price
• C. Firm-fixed-price contracts: contractor has full responsibility for performance costs and resulting profit
• D. Cost-reimbursement contracts

Answer: (C)

The main idea is how risk and profit are allocated through contract types. In a firm-fixed-price arrangement the price is fixed for the entire contract, so the contractor must cover all actual performance costs within that amount. Any cost overrun eats into the contractor’s profit, while any cost savings fall to the contractor as additional profit, meaning the contractor bears the full cost risk. This setup works best when requirements are well defined and changes are unlikely, giving the government reliable price and reducing administrative oversight. Other contracts assign risk differently. Time-and-materials contracts reimburse actual labor hours and materials, so the contractor isn’t carrying the full cost burden and the government bears more cost risk. Incentive contracts still involve a fixed or target price but include reward or penalty mechanisms based on performance, so risk is shared rather than placed entirely on the contractor. Cost-reimbursement contracts reimburse allowable costs plus a fee, meaning the government assumes most of the cost risk and the contractor’s exposure is limited to meeting the terms of cost reimbursement.

The main idea is how risk and profit are allocated through contract types. In a firm-fixed-price arrangement the price is fixed for the entire contract, so the contractor must cover all actual performance costs within that amount. Any cost overrun eats into the contractor’s profit, while any cost savings fall to the contractor as additional profit, meaning the contractor bears the full cost risk. This setup works best when requirements are well defined and changes are unlikely, giving the government reliable price and reducing administrative oversight.

Other contracts assign risk differently. Time-and-materials contracts reimburse actual labor hours and materials, so the contractor isn’t carrying the full cost burden and the government bears more cost risk. Incentive contracts still involve a fixed or target price but include reward or penalty mechanisms based on performance, so risk is shared rather than placed entirely on the contractor. Cost-reimbursement contracts reimburse allowable costs plus a fee, meaning the government assumes most of the cost risk and the contractor’s exposure is limited to meeting the terms of cost reimbursement.