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

The distinction between a fixed-price contract and a cost-plus contract is fundamental in contract management and procurement processes. A fixed-price contract is characterized by a pre-determined, set price that remains unchanged regardless of the actual costs incurred during the execution of the work. This provides certainty and predictability for both the buyer and the seller, as the seller takes on the risk of underestimating costs.

In contrast, a cost-plus contract is structured in a manner that allows the contractor to receive reimbursement for all legitimate costs incurred in the project, in addition to an agreed-upon fee or percentage of the costs as profit. This means that the actual costs can vary, and the contractor is compensated for those variations plus the predetermined profit margin.

This understanding highlights the correct choice, as it accurately reflects how each type of contract functions: the fixed-price contract has a fixed, set price, while the cost-plus contract involves covering costs plus an additional profit fee. The other options misrepresent the characteristics and financial implications of these contract types, leading to confusion about how they manage project costs and risk.