Q23 - Construction contractors working on

[juliehuh]

why is e not a good answer?

[beautylife_mine]

Hum....well, in my PT19 S4 Q23, the correct answer is D and
there are total of 26 quesitons...

And this question is about resolving the paradox?

Is the correct answer still (E)?

[ManhattanPrepLSAT1]

Nope the answer is definitely (D). I was looking at the wrong question. Just from rereading my post I see that I was looking at question 19 rather question 23.

PT19, S4, Q23 is definitely answer choice (D).

Let me run through this one.

We're asked to resolve the apparent paradox in the situation. The situation is that we find cost overruns to be more likely in the pricing system where we'd least expect it. We're asked to explain why.

(A) is irrelevant as it describes the scuttling of a project rather than the continuation of project beyond expected costs.
(B) could be tempting if we were to know whether long-term contracts were more likely to be fixed-profit contracts.
(C) is irrelevant to the situation. Early detection doesn't explain why the contract least suspected of cost overruns is the contract type more likely to have cost overruns.
(D) explains why cost overruns are more likely in the place where we'd least expect them, and that's because we're not looking for wasteful spending in places where we don't expect cost overruns. Thus one factor preventing cost overruns is not being utilized.
(E) would actually make the situation all the more puzzling. If the fixed-profit contracts were likely to be inflated, then they should be less likely to encounter cost overruns, rather than more likely as the stimulus suggest.

Sorry for any confusion initially about the answer choice, I was looking at the wrong question.

[Jacqmarie]

At first I chose E but after seeing your explanation I understand why it's incorrect. However I still don't understand the reasoning of answer choice D. Can you break down the answer more please?

[nbayar1212]

I think I can help you on this one.

D is basically saying that the clients who hire contractors typically only review the contracts when they are of the "percentage of profit" kind.

Meaning, they don't bother reviewing the contracts that have a fixed profit stipulation. If this is true, we now have a reason to explain why the fixed profit contracts run over estimated costs i.e. the clients don't bother looking at the contracts to catch anything that may be unnecessary/wasteful because they figure "hey, what incentive do these contractors have to rip me off if they don't even make more money if they do?...." and so probably overlook the possibility that the contractors are either a) bad at their jobs or b) misunderstood what the client was asking them to do or something else of the like.

Hope this helps.

[Mab6q]

Wow, what a confusing question. Hats off to you LSAT! I'm going to provide my breakdown of this question because I got it wrong.

There are two types of cost plus contracts:

1. Fixed percentages - here the contractor gets a percentage of cost

2. Fixed amount - here the contractor gets a fixed amount which is separate from the costs.

Ideally, you would expect final costs to be greater then what was originally estimated. However, it turns out that higher costs are more common for the fixed profit plans.

a. so why are the estimates higher than what was expected ?? This is useless

b. long term projects are out of scope

c. might be tempting, but it doesn't tell us that the estimates are not exceeded past what we expect for the fixed percentage plan.

d. Hard to understand, but the key comes with figuring out that this only applies to the fixed percentage plan: "only do so when .... profit varies with cost" means the fixed percentage because that's the only time the profit will vary with cost. So, if clients review such contracts, they identify waste and prevent it, whereas no such process occurs for fixed amount.

e. Very temping because it's tricky. But in fact this is the opposite of what we want. The originally situation was that the final costs exceeded the original estimate. But according to E, those in the fixed profit try to make the original estimate seem like more. There is the mismatch that the LSAT is playing on. E makes no sense and makes the situation more paradoxical.

Tough question.

Edit: I just tried doing this problem again, and I must say it still gave me a hard time. Not because I couldn't decipher D, but because E is so vague. The "cost estimates is most common in the case of fixed-profit contracts".... If you only ready that, you would think E was talking about the fixed amount over costs contract, but the last part throws in " as a percentage", which makes it more likely to be the fixed percentage one. I don't like the LSAT's use of fixed profit in E.

[a8l367]

I get it why D, but
if clients do not review bills (when fixed-profit method) how the fact that cost overruns are common uncovered? Police? Contractors?

[StratosM31]

(E) is wrong because of the following reasons:

a) As stated before, it talks about exaggerating costs, while the stimulus talks about final costs being higher than the initial costs agreed upon (means, the contractor does not really care during the construction process to keep the costs as low as agreed, resulting in higher final costs).
b) Even if it said final vs initial costs: how do we know that it is desirable that the profits appear lower as a percentage of the costs? There is no hint on the stimulus that implies that anybody wants this. Neither does it make sense for the contractor (they're only interested in the profits themselves and not as a percentage of costs) nor for the customer (as the amount they would pay is costs + profits, which increases with increasing costs). The only scenario I can think of where this could be relevant is some governmental authorities, taxes etc., but that's too far-fetched and definitely out of scope.

[hzj184]

Let me rephrase the conclusion:
Paradoxically, such cost overruns are actually less common if the contract is of the "cost-plus" contract.

Does the rephrased one make more sense of (D)?

Since clients billed under the cost-plus contract "expect final costs in excess of original cost estimates to be more common", they tend to review billing, thereby uncovering waste and reducing cost overruns.