Cost-plus contract Definition Bankrate.com Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content

Cost-plus contract

Cost-plus contract is a money term you need to understand. Here’s what it means.

What is a cost-plus contract

A cost-plus contract is an agreement that specifies the client will pay the contractor for construction expenses detailed in the contract, plus an additional percentage to provide the contractor with a profit. Many contracts specify that reimbursement may not exceed a specific dollar limit. The contract reimburses the contractor for direct costs and indirect costs, but all expenses must be documented and provided to the client.

Deeper definition

Cost-plus contracts are created to protect clients from cost overruns. They are commonly used in situations where the costs are difficult to define ahead of time, such as research and development activities. When the U.S. government contracts with military defense contractors to develop new technologies for U.S. defense, they typically use cost-plus contracts. because they enable them to pick the most qualified contractors rather than the contractors that provide the lowest bids. Award-fee cost-plus contracts hold the contractor accountable for the end product’s quality. Incentive-fee contracts provide larger profits for the contractors when they meet or exceed certain performance targets, such as cost savings. Fixed-fee contracts specify the contractor’s fees ahead of time, without offering an incentive for performance or cost savings. While cost-plus contracts are designed to avoid cost overruns, critics argue that cost-plus fixed-fee contracts don’t provide contractors with incentives to reduce costs further.

Cost-plus contract example

A construction company is contracted to build a $30 million commercial building. The cost-plus fixed fee contract states that the building cannot exceed $34 million. Per the contract, the construction company’s profit is 15 percent of the contract’s full price ($4.5 million). The contract specifies the construction company must submit receipts for supplies, services and any other overhead to the client. The contractor may bill the client for direct and indirect expenses. To ensure the work meets the client’s standards, the contract specifies the client may inspect and verify the work. Need money for your business?

More From Bankrate

Wondering how to protect your data from identity thieves? Check out these steps. With inflation making your bills even higher, here are a few ways to bring in cash. Americans were also more likely to blame Washington policymakers than credit them. These seven products can help protect you and your money from cybercrime. Holiday travel will be pricey this year, but Bankrate has tips on how to save. Here are steps you can take to establish your independence after financial abuse and help ensure long-term financial health. Selecting the right lawyer can mean the difference between eventual rebound and long-term pain. Financial therapists merge financial planning with mental health care. Weigh the pros and cons to decide if debt consolidation is right for your situation.