Which type of contracting includes cost plus fee and lump sum pricing?

The correct answer pertains to implicit incentive contracting, which includes arrangements like cost plus fee and lump sum pricing. Implicit incentives are often associated with contracts that allow for cost recovery and profit margins that are not fixed from the outset but instead depend on the contractor’s efficiency and performance.

In cost-plus contracts, for instance, the contractor is reimbursed for allowable costs incurred during the project, plus an additional amount for overhead and profit, which can serve as an incentive for contractors to control costs effectively, as the total payout to them can vary based on their efficiency. On the other hand, lump-sum pricing provides a fixed amount for the entire project, which can motivate the contractor to complete the project efficiently within the defined budget, as they retain any cost savings.

These incentives encourage parties to focus on both efficiency and quality of work, aligning interests between the contractor and the owner.

Other types of contracts like explicit incentive contracts may specify performance targets that trigger additional payments, shared cost agreements typically involve splitting costs associated with a project but do not directly imply pricing structures, and fixed-price contracts stand apart as they define a set price that does not fluctuate regardless of the actual cost incurred during the project execution. Each of these alternatives operates under different principles and risk-sharing mechanisms that