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 (called a "fixed fee" in most cases) is set ahead of time; the fee 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, or under an "award fee" or "incentive fee" provision such fee is earned only if certain milestones are met.

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.