Cost-plus Contract
A cost-plus contract pays the supplier for its allowable costs plus an additional agreed amount for profit, rather than a single fixed price.
In a cost-plus arrangement the buyer reimburses the supplier's actual costs and adds a fee, calculated as a fixed sum or a percentage. This shifts cost risk to the buyer but suits work where the scope cannot be pinned down in advance, such as complex projects, development work or emergency repairs where a fixed price would be guessed at.
Because the supplier is reimbursed for costs, the buyer needs transparency and controls — open-book accounting, cost caps and clear definitions of allowable costs — to keep spending in check. The main advantage is flexibility; the main risk is weaker incentive for the supplier to control costs, which is why cost-plus is used selectively rather than by default.
Frequently asked questions
- What is a cost-plus contract?
- A cost-plus contract reimburses the supplier's allowable costs and adds an agreed fee for profit, instead of setting a single fixed price. It suits work where scope is hard to define up front.
- What are the risks of a cost-plus contract?
- The buyer carries cost risk and the supplier has less incentive to control spending. Open-book accounting, cost caps and clear rules on allowable costs help manage this.
Related terms
Fixed-price Contract
A fixed-price contract sets a single agreed price for defined goods or services regardless of the supplier's actual costs to deliver them.
Read definitionTime and Materials (T&M)
Time and materials (T&M) is a contract structure where the supplier is paid for the actual labour hours worked and materials used, at agreed rates.
Read definitionShould-Cost Analysis
Should-cost analysis is a method of estimating what a product should cost to make, by breaking down its materials, labour, overhead and margin.
Read definitionExplore related across the knowledge graph
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