Please identify in the following contract types, cool the risk bearer is (buyer,
ID: 1709854 • Letter: P
Question
Please identify in the following contract types, cool the risk bearer is (buyer, seller or both buyer and seller).
A. who has the greatest risk in a Firm Fixed Price or Lump Sum contract?
B. who has the greatest risk in a Cost Plus type contract?
C. who has the potential to benefit from a Cost Plus Incentive Fee contract?
D. In a Cost Plus Fixed Fee contract who pays for all projects costs?
E. In the Cost Reimbursable type contracts who generally has the greatest risk?
F. The Cost Plus Percentage contracted (CPPC) reduces the motivation of the ____________________________ to complete the contract and may result in enormous cost to the _______________. .
Explanation / Answer
A)
Both have risk because once contract is signed price in market may increase or decrease but
At the start of the Contract, the Buyer knows how much payment has to be made to the Seller. Buyer liability is Fixed. Hence, we can say that the Buyer has very low Cost Uncertainty.
At the start of the Contract, the Seller does not about about the quantum of profit. The Seller may lose money. The Seller makes Profit if work is completed within the funds provided by the Buyer. Otherwise the Seller makes a loss. Hence, we can say that the Seller has high Uncertainty for making Profit.Hence Risk is high for the seller while it is low for the buyer.
B)
At the start of the Contract, the Buyer does not know how much payment will be made to the Seller. Buyer has potentially unlimited liability in a pure CP Contract. Hence, we can say that the Buyer has a very high Cost Uncertainty.
At the start of the Contract, the Seller knows that the Buyer will reimburse all legitimate costs. In addition the Seller will also get agreed Fees. The Seller likely to make always make some profit in a pure CP Contracts. Hence, we can say that the Seller has a low Uncertainty for making Profit. hence Risk is low for the Seller while it is high for the Buyer.
C) same as B
D) in cost plus fixed fee seller pays for cost + some fixed fee. if fee is more then fixed fee signed during contract signing buyer have to pay for remaining fee.
E)
In a cost-reimbursable contract, the owner (buyer) accepts most of the RISK.
f)
seller , buyer