Definition

1. Noun:
   • A type of agreement where payment is based on total expenses plus a fixed profit margin: A "cost-plus contract" is a formal agreement in which the buyer agrees to reimburse the seller for all allowable expenses incurred during the project, plus an additional, pre-agreed amount or percentage as profit.

Usage

• This type of contract is commonly used in situations where the full scope or costs of a project are difficult to estimate accurately at the outset, such as in construction, research and development, or defense procurement.
• It shifts the risk of cost overruns from the contractor to the client, as the client is obligated to pay for all legitimate costs.

Examples

• Noun:
  • The government awarded a cost-plus contract for the development of the new aircraft to ensure the contractor would not cut corners due to budget constraints.
  • To protect themselves from unforeseen expenses, the construction company prefers to work under a cost-plus contract for complex renovation projects.

Advanced Usage

• "Cost-plus-fixed-fee (CPFF) contract": A specific type of cost-plus contract where the profit is a fixed, predetermined sum, not a percentage of costs.
  • The research was funded through a cost-plus-fixed-fee contract, guaranteeing the institute a set profit regardless of the final project cost.
• "Cost-plus-percentage-of-cost (CPPC) contract": A less common type where the profit is a percentage of the total costs, which can incentivize the contractor to increase costs.
  • Due to the potential for abuse, cost-plus-percentage-of-cost contracts are often avoided in favor of fixed-fee agreements.

Variants and Related Words

• Fixed-price contract (n): A contrasting agreement where the total price is set in advance, regardless of the seller's actual costs.
  • For the simple software update, they opted for a fixed-price contract to control the budget.
• Time-and-materials contract (n): An agreement to pay based on the labor time and materials used, often with a capped maximum price, sharing some similarities with cost-plus models.
  • The consulting work was done under a time-and-materials contract.

Synonyms

• Reimbursement contract: A general term for agreements where costs are repaid.
• Cost-reimbursement contract: The formal term often used interchangeably with "cost-plus contract."

Related Phrases

• To work on a cost-plus basis: To perform a job under the terms of a cost-plus contract.
  • The engineering firm agreed to work on a cost-plus basis for the prototype phase.

Noun

1. a contract in which the contractor is paid his total cost plus a stated percentage of profit