In fixed-price contracts, who bears more risk and why?

• A. The contractor bears most of the cost risk because price is fixed.
• B. The government bears all cost risk because price is fixed.
• C. Cost risk is always shared equally.
• D. There is no cost risk in fixed-price contracts.

Answer: (A)

In fixed-price contracts, the price is set upfront and doesn’t change with what the project actually costs. That means the contractor takes on most of the cost risk. If the work ends up costing more than the fixed price, the contractor absorbs those extra costs and can’t recover them from the buyer. If costs are lower, the contractor benefits from the savings within the terms of the deal. The government pays the same fixed amount, so it faces less cost risk. While there can be variations like price adjustments or incentive-sharing in some arrangements, the standard fixed-price setup places the primary risk on the contractor because price is fixed.