Question

Explain what is meant by the two terms: "Price based Contracts" and "Cost-based Contracts

Answer 1

Ans :

PRICE BASED CONTRACTS :

These contracts are very much suitable for those projects there are conditions of rivalry or the competiton exits and thats why the owner`s requirement is provided in sufficient amount so as to determine the overall pricing and the scope of the work and then the contract is taken . These projects will have a single amount, within which all the hazard is borne by the contractual worker. in this the actual quantity of work is measured and is being set as the criteria or the basis on which the payment is given to the contractors . In this lump sum and the measurement contractors are based on either the variable pricing or the fixed pricing . These contracts are used for wide scale projects .

COST BASED CONTRACTS :

These contracts are suitable for low level of works and these projects does not involve huge amount of risks to be taken into consideration . In these type of contracts the contractor is being paid on the basis of cost incurred and also for the overhead allowance and profits . But the problem arrises due to the fact that it has no incentives for the contarctors to minimize the costs . Thats why they have introduced the system of target costs in which the cost is already decided between the owner and the contractors . If the target cost is less than the final cost then and then only th contractors fees in increased .  

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