Which contract type would a contractor have an incentive

Reference no: EM133714247

Question: Suppose you are hiring a contractor to remodel your kitchen. One contractor offers a fixed price for the complete job, while a competing contractor offers a cost-plus offer where you are billed a multiple of the contractor's cost of materials. The offers are summarized in the following table:

Contract Type Contract Description
Fixed-Price The contractor will charge to $10,000 remodel the entire kitchen, which includes the materials and labor costs.
Cost-Plus The contractor will charge the sum of the labor and materials costs multiplied by 1.40.
Suppose that the contractor incurred $7,500 in labor and materials costs. Under the Fixed-Price contract, the profit to the contractor is . Meanwhile, the profit to the contractor under the Cost-Plus contract is .

If the labor and material costs were to fall below $7,500, then the profit to contractor under the Fixed-Price contract will . Meanwhile, the profit to the contractor under the Cost-Plus contract would .

Under which contract type would a contractor have an incentive to use substandard materials and less competent labor?

Reference no: EM133714247

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