Correct Answer - Option 4 : Cost-plus percentage fee contract
Explanation:
Cost Plus Contract:
(i) Cost-Plus, mean something over and above the cost involved in completing the contract which is under consideration, the former word “Cost” will include all types of cost, i.e., direct, indirect, overhead, etc. incurred while performing the activity and the latter word “Plus” refer to profit which will include a specific percentage of income over and above the total cost of the contract as agreed by the contracting parties.
(ii) There are three major components of Cost-plus contract:
Direct cost → Overhead cost → Profit
Types of Cost Plus Contract:
The contract can vary only in the aspect of payment of profit or fee component to the contractor.
(1) Cost + Fixed Percentage Fee:
- In this, the contractor will receive the income in using a pre-decided percentage on the cost of the contract.
- Contractor gets profit as percentage of the total cost incurred by him. Profit increases with an increase in total cost.
(2) Cost + Fixed Fee Contract:
- Under this contract, the amount to be paid to the contractor is fixed and independent from the cost of the contract.
(3) Cost + Fixed percent / Fee and Incentive:
- Certain contracts may have an additional incentive covenant, which states that in case of early completion of the completion of levels as mentioned in the agreement, the contractor is eligible to receive the incentive as mentioned in terms of the agreement.
