Final answer:
To minimize risk in a contract for purchasing goods and services, a buyer should opt for a fixed price contract. Automatic inflation adjustments can further mitigate risk by maintaining the contract's real price. The correct option is A.
Step-by-step explanation:
If a buyer wants to have the least risk possible in setting up a contract to purchase goods and services from an outside firm, the most appropriate type of contract to use would be a fixed price contract. In a fixed price contract, the price what a buyer pays for a specific good or service is agreed upon at the outset and is not subject to change despite the actual costs incurred by the seller. This type of contract provides the buyer with the maximum amount of financial security because it places most of the risk on the seller. If costs are lower than anticipated, the seller benefits, but if costs are higher, the seller bears the additional expenses, not the buyer.
Conversely, other types of contracts like cost reimbursable or time and materials place more risk on the buyer because the final price can fluctuate based on actual costs or time spent. In situations where price controls such as a price ceiling exist, or where price control legislation influences market prices, a fixed price contract can provide stability and predictability for the buyer, making it a less risky option.
To further minimize risk, some contracts may include provisions for automatic adjustments based on inflation, which ensure that the real price reflects changes in the purchasing power of money over time. This can be advantageous to both parties as it prevents the seller from being bound to a low price if inflation rises unexpectedly, while also protecting the buyer from overpaying if inflation rates are lower than anticipated.