Which contract type includes a target cost arrangement?

• A. Time and materials
• B. Cost-plus
• C. Target cost
• D. Fixed-price

Answer: (C)

A contract with a target cost arrangement centers on a defined target cost and a sharing mechanism for any variance. This setup creates incentives for both sides to control costs: if actual costs are below the target, savings are shared; if they exceed the target, overruns are also shared according to a predefined formula. This makes it ideal when some scope or price uncertainty exists, because you get cost discipline without giving up flexibility. Other contract types don’t revolve around a negotiated target with shared risk: time and materials pays for actual time and materials with no target or sharing; cost-plus reimburses costs plus a fee without a target benchmark; fixed-price sets a single price upfront, transferring cost risk to the contractor and removing target-based incentives.