Cost plus contract definition
/What is a Cost Plus Contract?
A cost plus contract is an arrangement under which a contractor is reimbursed for all costs incurred on a project, plus a profit that is typically calculated as a percentage of the costs incurred. This arrangement is most commonly used for one-time projects or research projects where it is difficult to determine what the total cost will be. Given the risk of being overbilled by contractors, customers routinely audit the books of their contractors to ensure that they are being billed the correct amounts.
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Advantages of a Cost Plus Contract
A cost plus contract is quite favorable for the contractor, since there is no risk of loss. Instead, the contractor has an incentive to encourage the buyer to continually expand a project, since doing so allows the contractor to generate a larger guaranteed profit. This arrangement may be the only possible contracting option when a project has a highly uncertain outcome that would otherwise be too risky for the contractor to undertake.
Disadvantages of a Cost Plus Contract
From the perspective of the buyer, there are several disadvantages to a cost plus contract. First, the contractor may attempt to charge corporate-level overhead costs to the project; the buyer guards against this by specifying exactly which types of costs can be charged to the project for reimbursement purposes.