Which type of contract allocates risk primarily to the contractor?

A fixed-price contract allocates risk primarily to the contractor because it establishes a set price for the goods or services to be provided, regardless of the actual costs incurred by the contractor during performance. Under this type of contract, the contractor is responsible for managing costs and delivering the project within the agreed price. This means that if the contractor underestimates costs, they absorb those overruns. Conversely, if they manage to keep costs lower than anticipated, they benefit from the additional profit. This risk allocation encourages contractors to be efficient and cost-effective since their profit margin depends on controlling expenses within the fixed price agreed upon.

In contrast, other types of contracts, such as cost-reimbursement contracts, shift much of the risk to the government or contracting entity, as these contracts cover allowable costs incurred by the contractor and usually involve some form of additional fee. Time-and-material contracts also share risk, as they are compensated for the time and materials used, which can lead to uncertainty in total costs. Indefinite-delivery contracts provide flexibility in ordering and delivery but do not specifically allocate risk in the same way a fixed-price contract does.