Which contract type typically carries a higher level of uncertainty and risk for the contractor?

The type of contract that typically carries a higher level of uncertainty and risk for the contractor is a firm-fixed price contract. In this arrangement, the contractor agrees to complete the project for a set price regardless of the actual costs incurred. This means that if the project ends up costing more than anticipated due to unforeseen circumstances or issues, the contractor cannot request additional payment; they eat the extra costs.

Consequently, this type of contract is inherently risky for contractors as they must accurately estimate and manage their expenses, timeframe, and any potential complications that could arise during the project. If a contractor miscalculates or if unexpected challenges arise, they may significantly reduce their profit margins or incur losses.

Other contract types mentioned, such as cost-plus fixed fee, typically allow contractors to receive reimbursement for incurred costs plus a predetermined fee, thereby alleviating much of the financial risk associated with uncertainty in project costs. Time and materials contracts involve payment based on the time spent and materials used, reducing the risk because the contractor can modify the terms if project demands change. Coast sharing contracts involve shared costs between parties, further diluting liability and risk for the contractor.