A company has entered into a $20, 000, 000 fixed-price contract with a general contractor for the construction of a new retail outlet. For this contract, which of the following would represent the greatest risk?
A company has entered into a $20, 000, 000 fixed-price contract with a general contractor for the construction of a new retail outlet. For this contract, which of the following would represent the greatest risk?
In a fixed-price contract, the highest risk for the client is the substitution of inferior materials. The contractor is locked into a set price and may attempt to cut costs to maintain profitability, potentially leading to the use of lower-quality materials. Excessive labor charges, poor protection of materials, and failure to stay within budget are concerns primarily for the contractor, as they must manage costs within the fixed price.
I mean why is D
Correct answer is D, because the question statement explicitly says "Fixed Price Contract". So when there is a fixed price contract, the biggest risk is that the service provider might provide inferior quality service to keep the service within the contract price.
What does it mean? I dont get it
The other three reasons are a risk to the contractor since he has to bear the extra since it's a fixed price contract. Substitution of inferior materials will only affect the company.