Which compensation arrangement is defined as a fixed amount covering overhead and profit?

Which compensation arrangement is defined as a fixed amount covering overhead and profit?

• A. Unit Price
• B. Lump Sum Fee
• C. Cost Plus Incentive Fee
• D. Cost Plus Fixed Fee

Answer: (B)

This question tests how a contract’s compensation structure is expressed as a single fixed price that includes overhead and profit. The lump sum fee is a fixed total price for all defined work. With this arrangement, the contractor provides the complete scope for one agreed amount, which inherently covers overhead and profit within that price. Changes in scope usually require formal change orders and can shift risk to the contractor if the scope grows beyond the original agreement. Unit price, by contrast, is based on quantities times unit rates and can vary as quantities change, so it isn’t a single fixed amount for the entire project. Cost plus incentive fee reimburses actual costs plus an incentive-based fee, so total payment isn’t fixed. Cost plus fixed fee reimburses costs plus a fixed fee (the fee is fixed, but total payment still depends on actual costs incurred), so it isn’t a single fixed amount for the whole defined scope.

This question tests how a contract’s compensation structure is expressed as a single fixed price that includes overhead and profit. The lump sum fee is a fixed total price for all defined work. With this arrangement, the contractor provides the complete scope for one agreed amount, which inherently covers overhead and profit within that price. Changes in scope usually require formal change orders and can shift risk to the contractor if the scope grows beyond the original agreement.

Unit price, by contrast, is based on quantities times unit rates and can vary as quantities change, so it isn’t a single fixed amount for the entire project. Cost plus incentive fee reimburses actual costs plus an incentive-based fee, so total payment isn’t fixed. Cost plus fixed fee reimburses costs plus a fixed fee (the fee is fixed, but total payment still depends on actual costs incurred), so it isn’t a single fixed amount for the whole defined scope.