What is a cost-plus contract?

A cost-plus contract is defined as an agreement in which the contractor is reimbursed for all incurred costs associated with the project, in addition to receiving a predetermined allowance for overhead and profit. This approach provides flexibility for the contractor, ensuring they are compensated fairly for actual expenses that may be unpredictable or variable during the project lifecycle.

This type of contract is particularly advantageous in situations where project scopes may not be definitively established at the outset, and it can also encourage contractors to work efficiently since they are incentivized to control costs. The reimbursement often includes costs for labor, materials, and possibly other related expenses, while the overhead and profit component ensures that the contractor receives a margin for their work and risk.

In contrast to fixed-price contracts, where the contractor must complete the work for a set amount regardless of the costs incurred, a cost-plus contract allows for a more adaptable budgeting process that can accommodate unexpected expenses.