Cost-Plus Contract
A contract where the government reimburses the contractor for allowable costs plus a fee (profit) — used for complex projects where total costs are hard to predict upfront.
How It Works
Cost-plus contracts shift financial risk to the government: the contractor is reimbursed for actual costs plus an agreed-upon fee. This structure is common in defense and R&D where requirements are uncertain and costs are hard to estimate. Variants include Cost-Plus-Fixed-Fee (CPFF), Cost-Plus-Incentive-Fee (CPIF), and Cost-Plus-Award-Fee (CPAF). Critics argue cost-plus contracts create weak incentives to control costs because the contractor profits regardless of overruns. The government mitigates this through auditing and incentive structures that tie fees to performance.
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.
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About This Definition
This definition is part of the TaxDollarData Federal Spending Glossary — 31 terms explaining how the U.S. government spends taxpayer money. All definitions are written in plain language for taxpayers, journalists, contractors, and researchers.