Cost-plus contract

A cost-plus contract is an agreement containing the promise to pay a contractor its total costs plus a percentage of the costs (the "plus") as profit.

The profit (or fee) may be set ahead of time or may fluctuate depending on the contract.

These types of contracts, if the profit is not fixed ahead of time, can be a perverse incentive for a contractor to run up costs as a means of increasing profit.

As such, when used in the United States Government, a funding limitation is set at the outset, whereupon the estimated cost and fee is set ahead of time. The fee cannot be increased solely due to cost overruns, only if additional work is added. The fee may be:

• "fixed" (i.e., it does not change solely if additional funds are provided to cover cost overruns, but only if a change in the scope of work takes place; if work is removed the fee is reduced accordingly);
• based on "award fee" provisions where fee is earned only if certain milestones are met,
• "incentive fee" provisions where additional profit can be earned if costs come in below original estimates (or reduced if costs come in above them),
• some contracts (or line items) may be cost-only, whereby only the actual costs (which may include indirect costs) are reimbursed, with no fee in addition.
• other line items may be "cost-sharing" (common with universities), whereby both parties split the responsibility for final costs (on these, only costs which the Government will pay under the Federal Acquisition Regulation and agency supplement will be split; any "unallowable" costs are solely the contractor's responsibility).

It is not uncommon for a contract to have individual line items with varying fee arrangements.

Also in the US Government, a contractor working on a cost-plus contract is not required to continue work once funding limits are met and if no further funding is provided (except that the contract usually requires a final report to be delivered on the work performed); this contrasts with the "fixed-price" contract where a contractor must deliver the end item regardless of final costs required to do so. As such, in Government use these contracts are most common in research and development activities or on initial production runs of new military equipment.