LSAT 103 – Section 1 – Question 23

LSAT 103 - Section 1 - Question 23

September 1998

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Question
QuickView		 Type Tags Answer
Choices		 Curve Question
Difficulty		 Psg/Game/S
Difficulty		 Explanation
PT103 S1 Q23
+LR
+Exp
Resolve reconcile or explain +RRE
A
5%
160
B
5%
159
C
7%
160
D
46%
167
E
37%
164
155
167
180
 +Hardest 147.884 +SubsectionMedium

Kevin’s explanation

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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.

"Surprising" Phenomenon
Why are cost overruns more common in the fixed-profit kind of “cost-plus” contract than in the fixed-percentage kind of “cost-plus” contract, even though under the fixed-percentage kind higher costs would lead to higher profits for the contractor?

Objective
The correct answer should tell us about a difference between the fixed-profit and fixed-percentage kinds of “cost-plus” contract that would lead to a higher likelihood of cost overruns for the fixed-profit kind.

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.
This tells us about likelihood of accepting a fixed-profit contract when there are conditions that would lead to the end of the project. But this doesn’t impact the costs incurred on a project or why those costs more commonly go over expected costs for fixed-profits contracts.
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.
This doesn’t differentiate between fixed-profit and fixed-percentage contracts, so it’s not going to explain why cost overruns are more common for fixed-profit contracts.
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.
This doesn’t differentiate between fixed-profit and fixed-percentage contracts, so it’s not going to explain why cost overruns are more common for fixed-profit contracts.
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.
If clients review for wasteful expenditures only when profit varies with cost, that means they don’t review for wasteful expenditures on fixed-profit contracts (where profit doesn’t vary with cost). This could be why cost overruns are more common for this kind of contract.
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.
Cost overruns involve the excess cost over the estimated cost. If fixed-profit contracts more often involve exaggerated estimates, that should lead us to expect fewer cost overruns for these contracts, since the initial estimate would be higher than the actual expected costs.

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LSAT PrepTest 103 Explanations

Section 1 - Logical Reasoning

Section 2 - Logical Reasoning

Section 3 - Logical Reasoning

Section 4 - Reading Comprehension

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