Oliver 75 - 23rd Question

[sachin07]

A prime contractor in a customer project under CPFF contract has run into unexpected technical problems. Fixing them will require a lot of additional work to be done.

The company made a decision to book more staff and equipment from their subcontractors in order to adhere to the agreed timeline. The customer agreed to this decision.

What will most likely happen?

The contractor‘s indirect costs will increase and the customer‘s payment for them will increase, too.
The contractor‘s indirect costs will increase, but the customer‘s payment for them will not increase.
The contractor‘s indirect costs will not increase, but the customer‘s payment for them will.
Both the contractor's indirect costs and the customer‘s payment for them will not increase.

Please suggest .

[gauto988]

The contractor‘s indirect costs will increase and the customer‘s payment for them will increase.

[coolpmp69]

Indirect costs are costs that are not directly accountable to the project but are accountable to other costs (such as leasing an office space, use of shared office printer, admin personnel etc). Indirect costs may be either fixed or variable and are also called as overhead.

In the given question, the increase is in the direct cost as the contractor has to put in more effort, thus increasing the direct cost but not indirect cost. So option 4 is correct as client need not pay for the indirect cost.

[sachin07]

Thanks a lot . Sounds great. That's why we need to read each and every word properly.

[amolfuke]

IMO the option should be B because the contractor is hiring more staff that means more indirect costs may be due to additional equipment for them , their transportation cost , extra housekeeping cost ,electricity consumption cost (even though minor) by those extra staff. So the indirect cost for contractor will increase but he won't be able to charge customer for that.

[chakrabortyanshu]

This is an old thread. but didn't wanted to create new one.

As I interpret this question, indirect cost is increasing (same reasons as @amolfuke mentioned) and cost may/may not be charged to the customer depending on contract terms.
At the same time direct cost is also increasing for contractor and cost can / can't be claimed from customer based on contract terms.

So there are two possible scenarios

1. Indirect cost is increasing for the contractor and at the same time customer may/may not be charged for the same.
2. Direct cost is increasing for the contractor and customer may/may not be charged for the same.

As I understand, Customer has agreed to the contractor's decision. But it is not clear that customer has agreed to pay for extra cost as well.

Require more clarity on what should be the answer.

[manishpn]

based on information provided in question option B is the best choice,
the question does not mention there is any change to contract or contract value hence we should not assume customer will pay for any additional cost.
when you hire additional staff both the direct as well indirect cost will increase and contractor will have to take that cost.

[chakrabortyanshu]

thanks for clarification.

[rahul.kanugo]

based on information provided in question option B is the best choice,
the question does not mention there is any change to contract or contract value hence we should not assume customer will pay for any additional cost.
when you hire additional staff both the direct as well indirect cost will increase and contractor will have to take that cost.

I stil have doubt.

1st it is an unexpected technuca lissue.
2nd lot of cost is involved.
3d it is Cost plus fixed fee contract.... so it that case why should contractor need to bear the cost . Customer is also agreed.

I think answer is A

Please suggest

[Vigneshk]

Hi All,

My doubt is: Here the contractor hires more resources and they need to pay them (their direct cost increases) so wouldn't they back charge it to the client ? and if they do so wouldn't the amount to be paid by the customer eventually increase ?
I can understand the contractor's indirect cost will not increase but I thought it will be C but the source had the answer as D. Can someone please explain me ?