Which type of contract carries the highest risk for the buyer?

The type of contract that carries the highest risk for the buyer is a Cost Plus Incentive Fee contract. This contract structure allows the seller to be reimbursed for their allowable costs of performing the contract plus an additional amount as an incentive to control costs and enhance performance. The buyer assumes more risk here because the total cost is not capped; the seller's costs can fluctuate, and there is little incentive for them to keep costs low unless the incentive for performance is set significantly high.

In this contract, the buyer lacks a predictable cost limit, leading to potentially exceeded budgets if the costs incurred by the seller are significant. The more work or resources the seller uses, the more the buyer pays, which creates a scenario where the seller may have less incentive to operate efficiently.

In contrast, Fixed Price contracts provide the most cost certainty to the buyer, as the price is established upfront and does not change regardless of the costs incurred by the seller. Fixed Price Incentive Fee contracts also provide some cost control mechanisms that help align interests between the buyer and seller, and Cost Plus Fixed Fee contracts involve a set fee that reduces the seller's risk but lacks the incentive structure to control costs.