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.
