COST-PLUS CONTRACT

Summary

A cost-plus contract is a pricing arrangement where the buyer reimburses the seller for all legitimate project expenses (materials, labor, overhead) and then pays an additional predetermined fee or percentage as profit. This contract type shifts most financial risk from the seller to the buyer, as the final price isn't fixed upfront. It's commonly used when project scope is uncertain, requirements may change, or when accurate cost estimation is difficult at the contract start.

Usage Context

Critical when studying contract types in project procurement management, risk allocation strategies, and project cost planning. Essential for understanding when different contract structures are appropriate based on project uncertainty and risk tolerance.

Common Confusions

• Thinking the seller has no incentive to control costs (some cost-plus contracts include cost control incentives)
• Confusing cost-plus with time-and-materials contracts
• Assuming all project expenses are automatically reimbursable (only approved, legitimate costs qualify)
• Believing cost-plus always means unlimited budget (buyers often set cost ceilings)