Which contract type places the most financial risk on the contractor and provides a firm price for defined deliverables?

• A. Time-and-materials contract
• B. Cost-reimbursement contract
• C. Firm-fixed-price contract
• D. Cost-plus-fixed-fee contract

Answer: (C)

The key idea is how risk is shared between buyer and contractor based on contract type. A fixed-price contract fixes the total price for a defined set of deliverables. Because the price doesn’t change regardless of what the contractor actually spends to complete the work, the contractor must cover any cost overruns out of that fixed price. That puts the most financial risk on the contractor, while the buyer gains price certainty.

This is different from time-and-materials, where payment is tied to actual hours worked and materials used, so the buyer bears more of the cost uncertainty. In cost-reimbursement contracts, the buyer pays allowable costs plus a fee, so the contractor is largely protected from cost overruns. Cost-plus-fixed-fee also reimburses costs, with a fixed fee, again shifting more financial risk to the buyer rather than the contractor.

So the firm-fixed-price arrangement is the one that imposes the greatest financial risk on the contractor while offering a firm price for clearly defined deliverables.