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This question is very confusing to me b/c it is very wordy and has a lot of information. I picked (D) b/c it seemed like the best answer possible at the time. However, I still can't understand how (C) is the answer.

Ok, so we're trying to find out how the fixed-profit contract's final costs are more than the original cost, even though one would assume the fixed percenage contract usually is more.

thanks beforehand for any explanation

D is the right answer according to my answer key.

Oops, I picked (C). Made a mistake in the last post.

deputamadre wrote:This question is very confusing to me b/c it is very wordy and has a lot of information.

Sounds like this is a "resolve the paradox" question. Without seeing it, I'll just say that you can almost always ignore the complex language, which is meant to confuse and distract you -- all you need to do is summarize the two seemingly paradoxical pieces of evidence (seems like you're on your way from your post) and think of ways to allow them to both be true.

OP -- You're right, this is pretty dense. But, simplify the issue:

There are two types of cost-plus contracts:

1.) Fixed percentage. In this, the higher the costs, the higher the profit for contractors.
2.) Fixed amount. In this, the profit will be a fixed amount regardless of cost.

Based on those, one might expect cost overruns to be more frequent under the fixed percentage. After all, contractors would get bigger profits from bigger costs, so cost overruns would be good news for them.

However, the last line says that cost overruns happen more with the fixed amount contract, which is unusual because the contractors get no extra gain from piling up the costs.

The question is: why? Why would fixed amount contracts have more cost overruns.

Choice (D) explains it. Clients are allowed to look for wasteful spending, but they'll only do it with the fixed percentage contracts. So, under those contracts, they'll stop the contractors from wasterful spending. Under the fixed amount contracts, they won't see wasteful spending -- thus leading to a greater chance for cost overrun.

Choice (C) just explains how both types of contracts can be billed in installments to spot excess spending early. However, it still doesn't explain why fixed-profit contracts lead to more cost overruns.

HTH

- Chris