What is the difference between a "firm fixed price" and a "cost-plus" contract in construction?

What is the difference between a "firm fixed price" and a "cost-plus" contract in construction?

• A. Firm fixed price reallocates risk to the owner; cost-plus reallocates risk to the contractor.
• B. Firm fixed price sets a fixed total; cost-plus reimburses actual costs plus a fee.
• C. Firm fixed price sets a fixed total; cost-plus reimburses only estimated costs.
• D. Firm fixed price is used for maintenance; cost-plus is for design.

Answer: (B)

The main idea here is how payment and risk are handled between owner and contractor in different contract types. In a firm fixed price contract, the contractor agrees to deliver the project for one fixed price, regardless of actual costs. That means the contractor bears the risk of cost overruns and stands to gain if they come in under budget, while the owner gets price certainty for the whole job. In a cost-plus contract, the owner reimburses the contractor for actual allowable costs incurred plus an additional fee, so costs can rise without the contractor bearing the financial hit; the owner carries more of the cost risk but the contractor has predictable reimbursement and potentially less incentive to control expenses. That’s why the best description is that a firm fixed price sets a fixed total, while a cost-plus contract reimburses actual costs plus a fee. The other statements mix up who bears risk or how costs are paid, or imply limits (like only estimated costs) or specific uses (maintenance or design) that aren’t accurate or complete.

The main idea here is how payment and risk are handled between owner and contractor in different contract types. In a firm fixed price contract, the contractor agrees to deliver the project for one fixed price, regardless of actual costs. That means the contractor bears the risk of cost overruns and stands to gain if they come in under budget, while the owner gets price certainty for the whole job. In a cost-plus contract, the owner reimburses the contractor for actual allowable costs incurred plus an additional fee, so costs can rise without the contractor bearing the financial hit; the owner carries more of the cost risk but the contractor has predictable reimbursement and potentially less incentive to control expenses.

That’s why the best description is that a firm fixed price sets a fixed total, while a cost-plus contract reimburses actual costs plus a fee. The other statements mix up who bears risk or how costs are paid, or imply limits (like only estimated costs) or specific uses (maintenance or design) that aren’t accurate or complete.