Utah General Contractors - Business and Law Practice Exam

Which of the following best describes a cost-plus estimate?

1. A fixed price contract regardless of actual costs

2. Payment based on costs incurred plus a fee or percentage

3. A minimum price bid that limits expenses

4. Estimates based solely on time and staffing

The correct answer is: Payment based on costs incurred plus a fee or percentage

A cost-plus estimate is a pricing strategy commonly used in construction and contracting where the contractor is reimbursed for all allowable costs incurred during the project, along with an additional fee or a percentage of those costs as profit. This approach is beneficial for projects where the scope is uncertain or subject to change, as it allows for flexibility in budgeting and project execution. This method stands out among the other options because a fixed-price contract does not adjust for actual costs, meaning contractors assume the risk of cost overruns, while a minimum price bid sets a lower limit on costs rather than providing compensation for actual expenses plus profit. Additionally, simply estimating based on time and staffing does not encompass the reimbursement of actual incurred costs and the inclusion of a profit margin, which is central to the cost-plus framework. Thus, the description provided in the correct answer accurately reflects the nature of a cost-plus estimate, making it the best choice.