Cost-Plus Contract

How It Works

Cost-plus (or "cost-reimbursement") contracts are authorized under FAR Subpart 16.3 and used when requirements are too uncertain to price on a fixed-price basis, typically complex R&D, weapons development, or first-of-kind engineering. The contractor is reimbursed for actual "allowable" costs incurred (as defined by FAR Part 31 cost principles) plus an agreed-upon fee that represents profit. Three major variants exist: (1) Cost-Plus-Fixed-Fee (CPFF), where the fee is set at award and does not vary with actual cost; (2) Cost-Plus-Incentive-Fee (CPIF), where the fee scales up or down from a target based on a cost-sharing formula if final cost comes in under or over the target; and (3) Cost-Plus-Award-Fee (CPAF), where a portion of the fee is determined subjectively by the government based on periodic performance evaluations. Cost-plus contracts shift financial risk to the government, the contractor is paid for its actual costs even if the program runs over budget, which critics argue weakens cost-control incentives. The FAR explicitly prohibits Cost-Plus-Percentage-of-Cost (CPPC) contracts because they create perverse incentives (the contractor's fee grows with its costs). To mitigate weak incentives, the Defense Contract Audit Agency (DCAA) audits cost-reimbursement contractors' incurred costs, overhead rates, and indirect cost submissions, routinely questioning $5-10 billion per year in claimed costs. Major programs on cost-plus vehicles include the F-35 engineering and manufacturing development phase, the Columbia-class submarine design, the NGAD sixth-generation fighter, and most NASA human spaceflight contracts including Artemis Gateway. Cost-plus contractors must maintain approved accounting systems under DFARS 252.242-7006 and are subject to Cost Accounting Standards (CAS) at FAR Part 30 for contracts above $2 million. The DoD is under longstanding congressional pressure (NDAA provisions in FY2015, FY2018, and subsequent years) to shift more programs from cost-plus to fixed-price whenever feasible, though early-phase R&D remains predominantly cost-reimbursement.

Related Terms

• Firm-Fixed-Price Contract (FFP), A contract with a set price that doesn't change regardless of the contractor's actual costs, placing the financial risk on the contractor, not the government.
• Federal Contract, A legally binding agreement between the U.S. government and a private company to provide goods or services, from fighter jets to IT consulting.
• Federal Acquisition Regulation (FAR), The comprehensive rule book governing how federal agencies buy goods and services, covering everything from how to write a solicitation to when to use competitive bidding.