CIPS L4M3 Exam - Topic 2 Question 54 Discussion

Actual exam question for CIPS's L4M3 exam

Question #: 54
Topic #: 2

[All L4M3 Questions]

Infra Constructions receive a contract for construction of a building, and following terms were agreed upon. "The entire cost of the project will be reimbursed to Infra Constructions (estimated cost of the project being $ 25 million). The profits will be 20% of the entire cost of a project subject to a max of $ 5 million." This arrangement is an example of...?

AIncentive pricing arrangement

BGain-share/pain-share arrangment

CCost-plus pricing arrangement

DFixed-pricing arrangement

Show Suggested Answer

Suggested Answer: A

When a party takes on a contractual obligation, they are legally required to perform the obligation.

That same contracting party is still entitled to subcontract out the work to another service provider, unless the contract:

- is a contract for personal services, such an employment contract

- contains an express term preventing subcontracting out the work, or an implied term

Subcontracting clauses are written to control whether the contractor is entitled to subcontract, and how purchaser shall control that subcontracting process.

- Subcontracting clauses (delegation of contractual obligations to third parties)

- CIPS study guide page 153-157

LO 3, AC 3.2

by Sharmaine at Feb 11, 2025, 09:48 AM

Limited Time Offer

25%

Off

Get Premium L4M3 Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Estrella

3 months ago

I’m surprised they’d limit profits like that!

upvoted 0 times

...

Helga

3 months ago

No way, it’s capped at $5 million, so it’s cost-plus for sure.

upvoted 0 times

...

Coral

3 months ago

Wait, isn't it more of an incentive pricing arrangement?

upvoted 0 times

...

Kristel

4 months ago

I agree, the reimbursement part makes it clear.

upvoted 0 times

...

Willow

4 months ago

This is definitely a cost-plus pricing arrangement.

upvoted 0 times

...

Audra

4 months ago

I lean towards option C, but the profit cap makes me wonder if there's a gain-share aspect involved too.

upvoted 0 times

...

Alishia

4 months ago

I remember a similar question about profit sharing, but I feel like this one is more straightforward with the cost reimbursement.

upvoted 0 times

...

Renato

4 months ago

I'm not entirely sure, but it seems like it could also be an incentive pricing arrangement because of the profit cap.

upvoted 0 times

...

Willis

5 months ago

I think this might be a cost-plus pricing arrangement since they are reimbursing the entire cost plus a profit margin.

upvoted 0 times

...

Kenneth

5 months ago

The key here is the 20% profit margin subject to a $5 million cap. That sounds like an incentive pricing arrangement, where the contractor is motivated to keep costs down but has a limit on their potential upside.

upvoted 0 times

...

Irma

5 months ago

Okay, I think I've got it. This is a gain-share/pain-share arrangement, where the contractor shares in the upside if the project comes in under budget, but also has a cap on the maximum profit they can earn.

upvoted 0 times

...

Eleonore

5 months ago

Hmm, I'm a bit confused. The question mentions a maximum profit of $5 million, which doesn't seem to fit a typical cost-plus model. I'll need to think this through more carefully.

upvoted 0 times

...

Mose

5 months ago

This seems like a classic cost-plus pricing arrangement, where the contractor gets reimbursed for their costs and also earns a percentage of the total cost as profit.

upvoted 0 times

...

Shaunna

9 months ago

Wait, is this a trick question? Maybe it's a 'cost-plus-plus-plus' arrangement, where the contractor gets reimbursed, a percentage of the profits, and a free pizza every Friday. Just kidding, but you never know with these exam questions!

upvoted 0 times

...

Denny

9 months ago

I'm leaning towards the incentive pricing arrangement. The contractor gets a percentage of the profits, which encourages them to keep costs down and maximize efficiency. Sounds like a win-win to me!

upvoted 0 times

...

Rebeca

9 months ago

Hmm, this one's tricky. Is it a fixed-pricing arrangement? The contract seems to have set the profit percentage, but the total cost is reimbursed. Gotta think this one through carefully.

upvoted 0 times

Sharita

8 months ago

D) Fixed-pricing arrangement

upvoted 0 times

...

Salena

8 months ago

C) Cost-plus pricing arrangement

upvoted 0 times

...

Erasmo

8 months ago

B) Gain-share/pain-share arrangement

upvoted 0 times

...

Carin

8 months ago

A) Incentive pricing arrangement

upvoted 0 times

...

Apolonia

10 months ago

I'm pretty sure this is a gain-share/pain-share arrangement. The contractor gets a percentage of the profits, but there's a cap on the maximum amount they can earn. Sounds like a fair deal to me.

upvoted 0 times

Vincenza

8 months ago

Definitely, it ensures that both parties have a stake in the project's success.

upvoted 0 times

...

Reiko

9 months ago

It's a good way to incentivize the contractor to keep costs down.

upvoted 0 times

...

Loren

9 months ago

I agree, it does seem like a gain-share/pain-share arrangement.

upvoted 0 times

...

Arlie

10 months ago

This question is a no-brainer! It's clearly a cost-plus pricing arrangement, where the contractor gets reimbursed for their costs and also gets a percentage of the total cost as profit. Easy peasy!

upvoted 0 times