Critical Reasoning

Construction contractors working on the cutting edge of technology nearly always work on a "cost-plus" basis only. One kind of cost-plus contract stipulates the contractor's profit as a fixed percentage of the contractor's costs; the other kind stipulates a fixed amount of profit over and above costs. Under the first kind of contract, higher costs yield higher profits for the contractor, so this is where one might expect final costs in excess of original cost estimates to be more common. Paradoxically, such cost overruns are actually more common if the contract is of the fixed-profit kind.

Which one of the following, if true, most helps to resolve the apparent paradox in the situation described above?

(A) Clients are much less likely to agree to a fixed-profit type of cost-plus contract when it is understood that under certain conditions the project will be scuttled than they are when there is no such understanding.

(B) On long-term contracts, cost projections take future inflation into account, but since the figures used are provided by the government, they are usually underestimates.

(C) On any sizable construction project, the contractor bills the client monthly or quarterly, so any tendency for original cost estimates to be exceeded can be detected early.

(D) Clients billed under a cost-plus contract are free to review individual billings in order to uncover wasteful expenditures, but they do so only when the contractor's profit varies with cost.

(E) The practice of submitting deliberately exaggerated cost estimates is most common in the case of fixed-profit contracts, because it makes the profit, as a percentage of estimated cost, appear modest.

Please explain your answer choices.

IMO E.

The question being asked is - What explains the cost overruns under a fixed-profit model (i.e. the 2nd model described in the passage).

Options A-D come nowwhere close to answering this question. Option E explains the logic - that inflating the cost bills makes the percentage of the fixed profit $ to the total cost appear smaller. And hence the practice of over-inflating the costs.

Nope, that is not OA

It should be D ..

Here's my reasoning.

Its a paradox question , which means , there is an element of surprise to the actual outcome which nearly contradicts our expectation.The answer choice which describes the reason for that surprise is all we need to find

So what is the expectation here --> the expectation is that since higher costs lead to higher profits , so cases where costs overrun will occur will be mostly associated with first kind of contract ( % based on costs)
But whats the actual outcome --> In reality its opposite , its fixed profit cases ( 2nd kind of contract) , which are mostly associated with overrun costs.

Choice D clearly resolves this element of contradiction /surprise by saying that since clients review unncesssary expenses and cut down the expenditures when the cases are% based profit , but they dont do so when its fixed based . So here you go , if client is trying to reduce unncessary expenditures then thats why the overall cost gets reduced , which , in other words , means you have less chance for cost overrun for cases with % based profits . This choice thus gives us kind of 'AHA' factor which satisfies the surprise we were looking for

IMO D

OA plz

The OA is D. Thank you rohan_vus for the clear explanation.
I missed that profit varies with cost refers to the first type.

Sorry, re-read the question and the answer should in fact be D.

Some questions really require a patient reading!

I would go with option D as the correct option