XYZ Construction Company is contracted by ABC Corporation to build a large industrial facility. The parties agree to a Cost Plus a Percentage of Costs Fee Contract, where XYZ Construction will be reimbursed for the actual costs incurred during construction, plus a percentage as their fee. The contract does not include a maximum price or a guaranteed maximum price clause. As the construction progresses, XYZ Construction faces various challenges, including unforeseen delays, design changes, and supply chain disruptions. These issues lead to significant cost overruns, with the project's expenses far exceeding the initial estimates. The lack of a fixed price creates concerns for ABC Corporation, as the total cost keeps escalating. In this scenario, why does the Cost Plus a Percentage of Costs Fee Contract become unsuitable for ABC Corporation? What are the potential risks and drawbacks associated with this contract type in the context of cost overruns? How could ABC Corporation have better protected its interests and managed the costs through a different contract structure or provision? Hint: Please note that the answer to this case-based question would focus on the drawbacks and limitations of Cost Plus a Percentage of Costs Fee Contracts, particularly when cost overruns occur and how alternative contract types or provisions could have provided better cost control and risk management for ABC Corporation in this situation.

XYZ Construction Company is contracted by ABC Corporation to build a large industrial facility. The parties agree to a Cost Plus a Percentage of Costs Fee Contract, where XYZ Construction will be reimbursed for the actual costs incurred during construction, plus a percentage as their fee. The contract does not include a maximum price or a guaranteed maximum price clause. As the construction progresses, XYZ Construction faces various challenges, including unforeseen delays, design changes, and supply chain disruptions. These issues lead to significant cost overruns, with the project's expenses far exceeding the initial estimates. The lack of a fixed price creates concerns for ABC Corporation, as the total cost keeps escalating. In this scenario, why does the Cost Plus a Percentage of Costs Fee Contract become unsuitable for ABC Corporation? What are the potential risks and drawbacks associated with this contract type in the context of cost overruns? How could ABC Corporation have better protected its interests and managed the costs through a different contract structure or provision? Hint: Please note that the answer to this case-based question would focus on the drawbacks and limitations of Cost Plus a Percentage of Costs Fee Contracts, particularly when cost overruns occur and how alternative contract types or provisions could have provided better cost control and risk management for ABC Corporation in this situation.

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