An organization contracted a third-party service provider to plan, design, and build a new facility. Senior management would like to transfer all of the risk to the builder. Which type of procurement contract would the organization use?
A turnkey contract is a type of procurement agreement where the contractor is responsible for the entire project from planning and design to construction and delivery, ensuring that the organization receives a fully operational facility. In this case, the organization wants to transfer all risks to the builder, making a turnkey contract the most appropriate choice.
Full Risk Transfer: The contractor assumes all project risks, including design flaws, cost overruns, and delays.
Single-Point Responsibility: The builder is accountable for all aspects of the project until it is fully operational.
Minimal Client Involvement: The client does not have to manage the project’s complexities.
Option A (Cost-plus contract): This contract type does not transfer all risk to the builder; instead, the client bears some risk as they pay for actual costs plus a profit margin.
Option C (Service contract): Service contracts typically cover specific services (e.g., maintenance, consulting), not full construction projects.
Option D (Solutions contract): A solutions contract generally refers to software or technology solutions, not physical facility construction.
IIA’s Practice Guide on Contract Management and Risk Transfer: Highlights turnkey contracts as a method to shift project risks to third parties.
IIA’s Business Knowledge for Internal Auditing (CIA Exam Part 3 Syllabus): Covers procurement and contract types, emphasizing risk transfer mechanisms.
Why Option B is Correct:Why Other Options Are Incorrect:IIA References:Thus, the most appropriate answer is B. Turnkey contract.
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