What is the main difference between a fixed-price contract and a cost-plus contract?

• A. A fixed-price contract has a flexible cost
• B. A fixed-price contract reimburses contractors
• C. A fixed-price contract has a predetermined cost, while a cost-plus contract reimburses the contractor for costs plus a fee
• D. A cost-plus contract requires a bidding process

Answer: (C)

The main difference between a fixed-price contract and a cost-plus contract lies in how the payment structure is set up for the contractor. A fixed-price contract has a predetermined cost agreed upon before the project begins, meaning the contractor receives a specific amount to complete the work regardless of the actual expenses incurred. This type of contract puts the risk of cost overruns on the contractor, as they must manage their resources efficiently to stay within the agreed price.

In contrast, a cost-plus contract allows contractors to be reimbursed for their actual costs incurred plus an additional fee, which is often a percentage of those costs. This structure incentivizes contractors to work efficiently since their reimbursement is based on actual expenditures, and it mitigates risk to a certain extent as they do not have to absorb excess costs beyond their control.

Thus, the correct answer highlights that a fixed-price contract is based on a predetermined cost, while a cost-plus contract operates on a reimbursement model. The other answer choices do not accurately capture this fundamental distinction; for example, flexible costs and bidding processes relate to contract characteristics that do not precisely define the key difference between these two contract types.