What is a "cost-plus contract"?

A cost-plus contract is defined by the contractor being reimbursed for allowable incurred costs, plus an additional amount that serves as profit. This structure allows for flexibility in the project, especially when the full extent of the needed resources and expenses cannot be precisely predicted at the outset. It is particularly useful in research and development projects or other situations where uncertainties may affect the cost. The two primary components—reimbursement of costs and an added profit margin—allow the contractor to cover expenses while ensuring they receive compensation for their work.

In this type of contract, there is usually a clear delineation between what constitutes allowable costs, ensuring that both parties understand what is reimbursable. Additionally, the profit component motivates the contractor to complete the project efficiently while still managing costs effectively.

The other choices do not accurately describe a cost-plus contract. A fixed price contract pays a set amount regardless of actual costs incurred and does not include a profit margin linked to reimbursable costs. Contracts based solely on performance incentives are structured differently, focusing on delivering certain outcomes rather than recovering costs. Lastly, cost-plus contracts are not limited to service contracts; they can also apply to a range of projects across different industries.