2 Contracts Explain briefly the difference between costbased

2. Contracts

Explain briefly the difference between cost-based and price-based contracts

Solution

Cost-based contracts are based on, as it is obvious, costs. Costs are the key attribute or the key ingredient of such types of contracts as this ingredient acts as the base for deciding or coming to a price for the contract. Under such type of contracts, costs are sure to be covered and a definite profit at predetermined rate is assured. These contracts are less risky as costs are sure to be covered.

For instance : the contract is 10% plus cost contract and the total costs turns out to be 100$, then the total amount of the contract would be 100 + 10 =110$.

As opposed to Cost-based contracts, price-based contracts aren\'t dependent on the cost factor. Under such type of contracts, price or the amount concerned is predetermined and accepted. No matter the cost, the price remains what was decided. This type of contract is more risky as costs can be more than what can be expected.