Utah Contractor Practice Exam

What type of contract requires payment for actual costs plus additional profit?

1. Unit Price

2. Lump Sum

3. Fixed Price

4. Cost Plus

The correct answer is: Cost Plus

A Cost Plus contract is designed to cover the actual costs incurred by the contractor, along with an additional fee that represents the contractor’s profit. This type of contract is advantageous in situations where the scope of work is not entirely defined, allowing for flexibility as the project progresses. The contractor is reimbursed for all legitimate costs, including materials and labor, and then receives an agreed-upon profit margin, which may be a percentage of the cost or a fixed fee. In contrast, Unit Price contracts have a set price per unit of work completed, which means payment is determined based on measured quantities of work done. Lump Sum contracts involve a single total price for all work specified in the contract, regardless of the actual incurred costs. Fixed Price contracts similarly establish a predetermined price for the project, which does not change regardless of the contractor's actual expenses. These alternatives do not provide the same structure for reimbursing for actual expenses plus profit as found in a Cost Plus arrangement.