A lump-sum contract (also known as a fixed-price contract) is a contract type where the vendor agrees to complete a project for a predetermined price. In this scenario, the organization agreed to pay the vendor
$3,000,000 to design, procure, and construct a power substation.
* Lump-Sum Contract (Correct Answer: B)
* A lump-sum contract (also called a fixed-price contract) is an agreement where the contractor is responsible for completing the entire project at a set price.
* This type of contract transfers cost risk to the contractor since they must manage expenses within the agreed budget.
* IIA Standard 2120 - Risk Management states that internal auditors should assess contract risks, including financial and performance risks in vendor contracts.
* The contract price is predefined, which aligns with the scenario given in the question.
* Why the Other Options Are Incorrect:
* A. Cost-Reimbursable Contract (Incorrect)
* A cost-reimbursable contract involves reimbursing the vendor for actual costs incurred, plus a fee or profit.
* This is not applicable because the contract specifies a fixed price.
* C. Time and Material Contract (Incorrect)
* This contract type is based on actual time spent and materials used, typically used when scope is uncertain.
* The given scenario clearly defines the project and budget, making this option unsuitable.
* D. Bilateral Contract (Incorrect)
* A bilateral contract refers to a mutual agreement between two parties where both have obligations.
* While most contracts are bilateral in nature, this is not a specific contract type like lump- sum or cost-reimbursable contracts.
* IIA Standard 2120 - Risk Management (Evaluating contract risks)
* IIA Standard 2210 - Engagement Objectives (Assessing vendor contracts)
* IIA Standard 2130 - Compliance (Ensuring contract compliance)
Step-by-Step Justification:IIA References for This Answer:Thus, the correct answer is B. A lump-sum contract because the contract is based on a predefined, fixed price of $3,000,000.