Cost-plus contract

A cost-plus contract, also termed a cost reimbursement contract, is a contract where a contractor is paid for all of its allowed expenses, plus additional payment to allow for a profit. Cost-reimbursement contracts contrast with fixed-price contract, in which the contractor is paid a negotiated amount regardless of incurred expenses.

Frank B. Gilbreth, one of the founders of industrial engineering, used "cost-plus-a-fixed sum" contracts in his building contracting business. He described this method in an article in Industrial Magazine in 1907, comparing it to fixed price and guaranteed maximum price methods.

Cost-plus contracts first came into use by the government in the United States during the World Wars to encourage wartime production by large American companies. According to Martin Kenney, they "allowed what were then small technology firms like Hewlett-Packard and Fairchild Semiconductor to charge the Department of Defense for the price of research and development that none could pay on its own. This enabled the firms to create technology products that eventually created entire new markets and economic sectors".

There are four general types of cost-reimbursement contracts, all of which pay every allowable, allocatable, and reasonable cost incurred by the contractor, plus a fee or profit which differs by contract type.

A cost-reimbursement contract is appropriate when it is desirable to shift some risk of successful contract performance from the contractor to the buyer. It is most commonly used when the item purchased cannot be explicitly defined, as in research and development, or in cases where there is not enough data to accurately estimate the final cost.

Advantages:

Disadvantages:

Between 1995 and 2001 fixed fee cost-plus contracts constituted the largest subgroup of cost-plus contracting in the U.S. defense sector. Starting in 2002 award-fee cost plus contracts took over the lead from fixed fee cost plus contracts.

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