Estimating Practice Exam

What type of contract involves the owner reimbursing all project costs plus an additional amount for profit?

1. cost-reimbursement contract

2. fixed-price contract

3. cost-plus contract

4. time and materials contract

The correct answer is: cost-plus contract

A contract that involves the owner reimbursing all project costs plus an additional amount for profit is identified as a cost-plus contract. This type of agreement ensures that the contractor is compensated for all incurred expenses while also receiving a predetermined fee or percentage as profit. In a cost-plus contract, the emphasis is on the reimbursement of actual costs, which can include materials, labor, and overhead. The added margin ensures that the contractor is incentivized to complete the project efficiently while covering their expenses. This structure is particularly useful in situations where project costs are difficult to estimate upfront and allows for flexibility in project scope. By contrast, a cost-reimbursement contract often entails a more complex arrangement that may include stipulations on cost caps or specific types of reimbursable costs, while a fixed-price contract sets a specific price that the owner pays regardless of actual costs incurred. A time and materials contract specifies the payment based on the actual time worked and materials used, but does not typically include a structured profit element like in a cost-plus arrangement.