Cost-Plus, Cost-Plus-Contract

Refers to a contract for the supply of goods or services where a supplier is paid the cost of the goods or services plus an amount of overhead and profit. Cost-plus contracts are simple in principle and reduce supplier risk substantially, but they also reduce the benefit to the supplier of keeping costs down. A bonus mechanism for delivery on or below cost is therefore usually wise, which should be arranged in such a way that delivery at or below projected cost (on time and to quality standards) is more profitable than a cost overrun.

Cost-plus-contracts are frequently used by governments and are highly criticized in this context.  Cost-plus is sometimes also referred to as a “time and materials” (T&M) contract – and this is US federal procurement usage.

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