Which type of contract places the maximum risk on the contractor for costs?

The firm-fixed-price contract places the maximum risk on the contractor for costs because it requires the contractor to complete the project for a set price. This means that the contractor assumes all the financial risks associated with the project, including cost overruns or unforeseen expenses. If the costs exceed the initial estimate, the contractor cannot charge the client additional fees. This structure incentivizes the contractor to control costs and manage resources efficiently to protect their profit margins.

In contrast, cost-plus-fixed-fee contracts provide a guaranteed profit margin for the contractor, which reduces their financial risk. Time-and-materials contracts involve payment for the actual time spent and materials used, which can also limit the contractor's risk to some extent, as they are reimbursed for their expenses. Cost-reimbursement contracts further shift the risk to the client since they cover the contractor’s allowable costs plus an additional payment for profit, making it the least risky option for the contractor.