Question

A contract calls for a total payment of $800,000 with a guarantee. Essentially the contractor is guaranteed to make at least $200,000 above his costs. If the contractor can demonstrate his costs exceed $600,000, the project will pay the difference, with a $50,000 ceiling on the overage. The contractor demonstrates he spent $623,000. How much (gross) must the project remit to the contractor?

Another option for the same contract has the contractor guaranteed to be paid his costs plus 20%, for costs that exceed $600,000. With the same initial assumption—guarantee of $800,000 gross payment (no requirement to itemize costs), but if the contractor can show that costs exceed $600,000, the project will pay $800,000 plus the costs that exceed $600,000, plus 20% of those excess costs, with a ceiling of $900,000 gross. The contractor demonstrates he spent $623,000. How much (gross) must the project remit to the contractor?

Answer 1

Case 1 : The total that project must remit to the contractor is the sum of two things. First is the guaranteed payment of $800,000. Second is the cost incurred by the contractor above $600,000 with a constraint that a maximum of $ 50,000 will be paid. Now the contractor has demonstrated that the cost incurred is $623,000 which is $23,000 above the limit of $600,000. As this difference is still less than $ 50,000, the project will remit this to the contractor. Hence the gross which the project has to remit to the contractor is $800,000 + $23,000 = $823,000

Case 2 : In this case the total that the project must be remit is a sum of three things. First is the guaranteed payment of $800,000. Second is the cost incurred by the contractor over and above the limit of $600,000. Third is the 20% of the cost incurred by the contractor over and above the limit of $600,000. If this total exceeds $900,000, then the project will only remit $900,000. Now the contractor has demonstrated that the cost incurred is $623,000 which is $23,000 above the limit of $600,000. 20% of the costs that exceed $600,000 is equal to 20% of $23,000 = $4,600. The total of these three sums is $800,000 + $23,000 + $4600 = $827,600 = $827,000. As this total is less than $900,000 project will remit $827,000 to the contractor