Cost Accounting

What is a Cost Plus Contract?

Cost plus contract, which is also known as a cost-reimbursement contract, pays a contractor for all permitted expenses up to a predetermined limit plus an additional sum to cover profit on top of that.

Contracts with a fixed price that pay the contractor the agreed-upon sum regardless of costs incurred are also known as cost-reimbursement contracts. In order to support large American companies’ production during the World Wars, cost-plus contracts were first used in the US.

Cost-Plus Contracts

Under this type of contract, the contractor agrees to pay the contractor the contract price plus an agreed percentage above the contract price or a fixed fee. Cost-plus contracts are generally used only by government agencies.

● Where estimates cannot be made or predetermined, this is suitable.

● If the service is innovative and no precedent is available, then cost-plus contracts may fit.

Another type of cost-plus contract that occasionally works in the client’s favour is the incentive fee contract. With this arrangement, the contractor gets paid more because they spend less money on labour or materials to carry out the contract’s requirements. The higher fee, though, can occasionally cancel out the savings.

Simply because a fixed-price contract gives the client more control, many people and companies prefer to work with them. Cost-plus agreements typically don’t offer any incentives for the contractor to keep close tabs on expenses. But if quality rather than cost is the client’s top priority, a cost-plus construction contract is probably the best choice.

Advantages of Cost Plus Contract

● The contractor is assured of some extra money, resulting in a definite profit.

● The customer feels satisfied as he is charged a reasonable fixed price to execute the


● The contractor is relieved of unnecessary and elaborate calculations as in the case of

escalation-clause contracts.

Disadvantages of Cost Plus Contract

● The “Plus” factor is determined by the total cost. To make more profit, the contractor is interested in increasing the cost.

● The customer gets affected.

● The customer is not in a clear-cut position to know exactly the cost of the work till it gets completed.


Unlike a fixed-cost construction contract, a cost-plus construction agreement is a contract in which the owner pays the contractor the actual costs of the materials and labour plus an additional negotiated fee or percentage over that amount.

Cost plus pricing, often used in government contracts, refers to a contract where the price is based upon the actual cost of production and any agreed-upon rates of profit or fees. FC% is the per cent of fixed costs that are allocated to each product.

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