Which contract type places more risk on the buyer due to reimbursement of actual costs plus a fee?

• A. Time and materials contract
• B. Fixed-price contract
• C. Performance-based contract
• D. Cost-reimbursable contract

Answer: (D)

In this type of contract, the buyer ends up paying for what actually happens. The seller is reimbursed for actual costs incurred plus a fee, so the final price isn’t fixed in advance. If the project runs into unforeseen expenses, scope changes, or delays, those extra costs are borne by the buyer rather than the contractor. The fee provides some incentive for the contractor, but it doesn’t cap or limit the reimbursed costs, so the total amount the buyer pays can grow as the work progresses. That’s why this arrangement puts more cost risk on the buyer.

For contrast, a fixed-price contract sets a single price up front, which shifts most of the cost risk to the seller; time and materials involves paying for actual labor and materials at stated rates (often with a cap or not-to-exceed clause); and performance-based contracts tie payments to delivered outcomes, which changes the focus of risk away from cost alone.