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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...?
Suggested Answer: A
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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
32 comments · newest first
ES
Estrella
11 months ago
I’m surprised they’d limit profits like that!
HE
Helga
11 months ago
No way, it’s capped at $5 million, so it’s cost-plus for sure.
CO
Coral
12 months ago
Wait, isn't it more of an incentive pricing arrangement?
KR
Kristel
12 months ago
I agree, the reimbursement part makes it clear.
WI
Willow
1 year ago
This is definitely a cost-plus pricing arrangement.
AU
Audra
1 year ago
I lean towards option C, but the profit cap makes me wonder if there's a gain-share aspect involved too.
AL
Alishia
1 year ago
I remember a similar question about profit sharing, but I feel like this one is more straightforward with the cost reimbursement.
RE
Renato
1 year ago
I'm not entirely sure, but it seems like it could also be an incentive pricing arrangement because of the profit cap.
WI
Willis
1 year ago
I think this might be a cost-plus pricing arrangement since they are reimbursing the entire cost plus a profit margin.
KE
Kenneth
1 year 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.
IR
Irma
1 year 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.
EL
Eleonore
1 year 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.
MO
Mose
1 year 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.
SH
Shaunna
1 year 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!
DE
Denny
1 year 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!
RE
Rebeca
1 year 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.
SH
Sharita
1 year ago
D) Fixed-pricing arrangement
SA
Salena
1 year ago
C) Cost-plus pricing arrangement
ER
Erasmo
1 year ago
B) Gain-share/pain-share arrangement
CA
Carin
1 year ago
A) Incentive pricing arrangement
AP
Apolonia
1 year 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.
VI
Vincenza
1 year ago
Definitely, it ensures that both parties have a stake in the project's success.
RE
Reiko
1 year ago
It's a good way to incentivize the contractor to keep costs down.
LO
Loren
1 year ago
I agree, it does seem like a gain-share/pain-share arrangement.
AR
Arlie
2 years 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!
LO
Loreta
1 year ago
D) Fixed-pricing arrangement
LE
Lelia
1 year ago
C) Cost-plus pricing arrangement
CH
Chana
1 year ago
B) Gain-share/pain-share arrangement
RO
Rodolfo
2 years ago
A) Incentive pricing arrangement
GE
Germaine
2 years ago
I'm not sure, but I think it could also be C) Cost-plus pricing arrangement because the profits are based on a percentage of the entire cost.
TO
Tomoko
2 years ago
I agree with Jesus. The terms of the contract suggest a gain-share arrangement.
JE
Jesus
2 years ago
I think the answer is B) Gain-share/pain-share arrangement.