What type of contract specifies that the designer's fee is a percentage of the costs of labor and materials?

The correct choice is the cost plus percentage contract, as it directly relates to the method of compensation based on the actual costs incurred during the project. In this type of contract, the designer or contractor is reimbursed for the direct costs of labor and materials involved in the project and is additionally paid a percentage of those costs as the fee. This structure incentivizes the designer to ensure quality and thoroughness in the work, as their fee increases with the rising costs of materials and labor.

This approach is particularly beneficial in scenarios where project costs cannot be precisely estimated at the outset, allowing for flexibility as the project evolves. It also fosters a collaborative relationship between the client and the designer, as both parties are engaged in the management of costs throughout the project.

In contrast, a fixed fee contract establishes a set amount that will be paid regardless of actual costs, while a time and materials contract compensates based on time spent and materials used but does not specify a percentage of the costs. Lastly, a unit price contract defines payment based on specific measurable units of work rather than a percentage of costs. Each of those alternative contracts serves different purposes and scenarios within project management and design work.