Problem
I. A contract calls for a total payment of $800,000 with a guarantee. Essentially the contractor is guaranteed to make at least $200,000 above his costs. If the contractor can demonstrate his costs exceed $600,000, the project will pay the difference, with a $50,000 ceiling on the overage. The contractor demonstrates he spent $623,000. How much (gross) must the project remit to the contractor?
II. Another option for the same contract has the contractor guaranteed to be paid his costs plus 20% for costs that exceed $600,000. With the same initial assumption-a guarantee of $800,000 gross payment (no requirement to itemize costs), but if the contractor can show that costs exceed $600,000, the project will pay $800,000 plus the costs that exceed $600,000, plus 20% of those excess costs, with a ceiling of $900,000 gross. The contractor demonstrates he spent $623,000. How much (gross) must the project remit to the contractor?
III. Under option II, at what dollar amount of total costs would the contractor be assuming all of the excess costs beyond that point?
IV. In which option did the project assume more of the risk of a cost overrun? Explain.