Which contract type places maximum risk on the contractor?

The firm-fixed-price contract type places the maximum risk on the contractor because it establishes a set price for the contract regardless of the actual costs incurred during the execution of the work. This means that if the costs exceed the estimated amount, the contractor cannot raise the price to cover those additional expenses. As a result, the contractor bears the financial risk associated with cost overruns. They must accurately estimate their costs and manage resources effectively to ensure profitability.

In contrast, other contract types, such as cost-plus-fixed-fee and cost-reimbursement, allow for flexibility in covering costs, shifting much of the financial risk back to the client. Time-and-materials contracts also distribute risk differently by providing a base rate plus payment for materials, which can lead to uncertainties in total costs but does not place the same level of risk on the contractor as a firm-fixed-price contract does. Thus, the structure of the firm-fixed-price contract inherently creates a higher burden of risk on the contractor compared to these other contract types.