Which category of contracts places minimal cost risk on the contractor?

Cost Plus Fixed Fee Contracts are designed to minimize the cost risk for the contractor. In these agreements, the contractor is reimbursed for allowable costs incurred during project execution and also receives a fixed fee that does not vary with the costs. This structure provides a financial safeguard against unforeseen expenses, ensuring that the contractor can recover their costs while receiving a predetermined profit, which reduces their exposure to financial risk.

In contrast, other contract types, such as Firm-Fixed Price Contracts, place the risk of cost overruns solely on the contractor. If expenses exceed the agreed-upon price, the contractor absorbs those extra costs, which could lead to significant financial exposure. Hybrid contracts may combine elements of various types, but they typically do not provide the same level of risk minimization as cost plus fixed fee arrangements. Incentive contracts, while motivating performance improvement through potential financial rewards, also carry risk for the contractor regarding cost management, as they may still have to bear some expenses to meet the incentive criteria.