Estimating Practice Exam

Why might cost-plus contracts be the last resort for owners?

1. They are too expensive

2. They are difficult to manage

3. They can expose owners to financial risk

4. They have strict timelines

The correct answer is: They can expose owners to financial risk

Cost-plus contracts can be seen as a last resort for owners primarily because they expose them to significant financial risk. In this type of contract, the owner agrees to pay the contractor for all project costs, plus a predetermined fee that can be a percentage of the costs or a fixed fee. This structure can lead to escalating costs, as there is little incentive for the contractor to control expenses—any cost incurred directly affects the owner’s budget. The potential for overruns means that the total project cost could exceed initial estimates, leading to unexpected financial burdens for the owner. While the other factors may contribute to the complexity and management of cost-plus contracts, the financial implications are the most critical reason for their classification as a last resort. Owners need to ensure they have a firm grasp on their budgets and the scope of their projects, and a cost-plus approach can undermine that control, increasing uncertainty regarding final expenditures.