Which pair of statements is best? a. cost-plus contracts are prone to budget overruns while turnkey contracts are typically underbid by the contractor. b. cost-plus contracts are prone to a budget surplus while turnkey contracts are typically underbid by the contractor. c. cost-plus contracts are prone to a budget surplus while turnkey contracts are typically overbid by the contractor. d. cost-plus contracts are prone to budget overruns while turnkey contracts are typically overbid by the contractor.

Cost-plus contracts are prone to budget overruns while turnkey contracts are typically underbid by the contractor.

Explanation:

Cost overruns are a major concern with cost-plus contracts, since all costs are reimbursed and the additional fee may already be known in advance. However, this problem can be mitigated or avoided if the contract is structured properly. For example, the contract can offer an incentive fee for saving money on materials, or the contract can limit the amount of money that can be spent on materials.

The turnkey contract eliminates the guesswork for the client during the construction project. Turnkey contracts require an estimate with very detailed specifications prior to starting the job.

This type of contract begins with a deposit being paid at contract signing. A schedule with milestones the contractor must reach are drawn up prior to the payment as an established part of the contract. This type of contract is right for a client that wants to know exactly what his costs are going to be for the life of the project. The downside is that if the cost of materials may come down–and the client does not get to reap.

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