Cost-Plus (Cost-Reimbursable) Contract

A cost-plus contract — in federal terminology, a cost-reimbursable contract with fee based on actual costs — is a basis of payment in which the supplier is reimbursed for costs reasonably and properly incurred in performing the work, plus a profit or fee. It is used where the requirement is genuinely impossible to define tightly enough for a firm price: emerging research, complex repairs, and certain engineering or development work.

What it is

Per the federal Standard Acquisition Clauses and Conditions (SACC) Manual, the cost-plus clause provides that “the Contractor will be paid its costs reasonably and properly incurred in the performance of the Work, in accordance with Contract Cost Principles 1031-2, as determined by a government audit, plus a profit computed in accordance with Chapter 10, Cost and Profit, of the Supply Manual.” The results of the government’s audit are conclusive. The clause carries a Total Estimated Cost as a Limitation of Expenditure — an estimated ceiling, not a guaranteed price. The Supply Manual’s basis-of-payment guidance also recognizes cost-reimbursable with no fee, and fixed-fee variants.

When it applies

Treasury Board contracting policy (section 10.6.5) states that if defining the requirement is so difficult that competition would not be meaningful, it may be necessary to use cost-plus-a-fixed-fee or cost-plus-a-percentage-of-cost as a basis of price — and that cost-plus-a-percentage-of-cost should be avoided if at all possible, because the supplier’s profit grows with its costs. With a fixed fee, the fee does not vary with actual cost, which limits that incentive problem. Because costs are open-ended, cost-plus contracts depend on government audit rights and cost principles rather than market price discipline.

Common questions

Cost-plus vs firm fixed price — which is riskier for the buyer?

Cost-plus shifts cost risk to the buyer: the buyer pays actual audited costs even if they overrun the estimate (up to the limitation of expenditure). A firm fixed price locks the buyer’s cost and shifts overrun risk to the supplier. Federal buyers default to firm fixed price wherever the requirement can be defined; see firm fixed price contract.

How is profit determined on a cost-plus contract?

Not by negotiation alone — profit is computed under Chapter 10 (Cost and Profit) of the Supply Manual, which sets the framework for allowable costs and fee determination. The governing clause text is published in the SACC Manual. See also the Supply Manual.

Related definitions

Firm fixed price contract · Unit price vs lump sum contracts · Contract ceiling