A cost-plus contract, also termed a cost plus contract, is a contract such that a contractor is paid for all of its allowed expenses, plus additional payment to allow for risk and incentive sharing. Cost-reimbursement contracts contrast with fixed-price contract, in which the contractor is paid a negotiated amount regardless of incurred expenses.

History

Frank B. Gilbreth, one of the early developers of industrial engineering, used "cost-plus-a-fixed sum" contracts for his building contracting business. He described this method in an article in Industrial Magazine in 1907, comparing it to fixed price and guaranteed maximum price methods. Cost-plus contracts were first used by the government in the United States during World War I to encourage wartime production by American businesses. According to Martin Kenney, they "allowed what were then small technology firms like Hewlett-Packard and Fairchild Semiconductor to charge the Department of Defense for the price of research and development that none could pay on its own. This enabled the firms to create technology products that eventually created entire new markets and economic sectors".

Types

There are four general types of cost-reimbursement contracts, all of which pay every allowable, allocatable, and reasonable cost incurred by the contractor, plus a fee or profit which differs by contract type.

Usage

A cost-reimbursement contract is appropriate when it is desirable to shift some risk of successful contract performance from the contractor to the buyer. It is used most commonly when the item purchased cannot be defined explicitly, as for research and development, or for cases where there is not enough data to estimate the final cost accurately. A cost-plus contract is often used when performance, quality or delivery time is a much greater concern than cost, such as in the United States space program. Cost plus contracting was expanded to include services such as engineering, consulting, and a variety of other such efforts in the 1980's.

Recent

Between 1995 and 2001 fixed fee cost-plus contracts constituted the largest subgroup of cost-plus contracting in the U.S. defense sector. Starting during 2002 award-fee cost plus contracts became more numerous than fixed fee cost plus contracts. The distribution of annual contract values by sector category and award types indicates that cost plus contracts in the past had the largest importance in research, followed by services and products. In 2004, however, services replaced research as the dominant sector category for cost-plus contracts. For all other contract types combined the relative ranking is reversed to the original cost-plus order, meaning that products are most numerous, followed by service and research. With cost-plus contracting being designed primarily for research and development, cost plus contracts were used in many different efforts unrelated to research and development. The percentage of cost-plus contracting within a contract is expected to be correlated to the percentage share of research undertaken in any given program. However, several programs, such as the Lockheed Martin F-35 Lightning II, UGM-133 Trident II, CVN-68, and the CVN-21 deviate from this pattern by continuing to make extensive usage of cost-plus contracting despite the programs being subsequent to the research and development state. NASA experienced significant cost and delivery delays on some cost-plus contracts contributing to delays of some Space Launch System launches.

Advantages

Criticism