# Problem of the Day--Pricing Contingencies

Assume that you are pricing a firm-fixed-price contract using cost analysis. The prospective contractor has included a contingency of $100,000 in its cost proposal of the type described at FAR 31.205-7(c)(1):

QuoteThose that may arise from presently known and existing conditions, the effects of which are foreseeable within reasonable limits of accuracy; e.g.,anticipated costs of rejects and defective work. Contingencies of this category are to be included in the estimates of future costs so as to provide the best estimate of performance cost.

There is a 90% chance that this contingency will occur. If it occurs, there's a 100% chance it will cost $100,000.

The prospective contractor can take Precaution A, which will cost $50,000. If the contingency occurs, Precaution A would reduce the chance of the contingency costing $100,000 to 30% (there would be a 70% chance the contingency would cost $0).

The prospective contractor can take Precaution B, which will cost $75,000. If the contingency occurs, Precaution B would reduce the chance of the contingency costing $100,000 to 10% (there would be a 90% chance the contingency would cost $0).

The prospective contractor is free to take Precaution A, Precaution B, or do nothing.

What amount for this contingency would you allow in the contract price?

You may ask for more facts if you'd like or ask to make an assumption. Do not fight the hypothetical. Enjoy.

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