Cost-Plus Contract

AAA

DEFINITION of 'Cost-Plus Contract'

An agreement to pay a company for a job based on the amount of money used to buy the materials required to complete that job plus an added payment. A cost-plus contract fully reimburses a contractor for the cost of materials and then adds additional money to arrive at the total cost of the job. Cost-plus contracts are commonly used in research and development activities, where it is difficult to determine in advance how much a job should cost. For example, the U.S. government has agreed to cost-plus contracts with military defense companies that are developing new technologies for national defense.

INVESTOPEDIA EXPLAINS 'Cost-Plus Contract'

Cost overruns are a major concern with cost-plus contracts, since all costs are reimbursed and the additional fee may already be known in advance. However, this problem can be mitigated or avoided if the contract is structured properly. For example, the contract can offer an incentive fee for saving money on materials, or the contract can limit the amount of money that can be spent on materials.



RELATED TERMS
  1. Variable Cost-Plus Pricing

    A pricing method in which the selling price is established by ...
  2. Unilateral Contract

    A legally enforceable promise - between legally competent parties ...
  3. Bilateral Contract

    A bilateral contract is a reciprocal arrangement between two ...
  4. Oral Contract

    A type of business agreement that is spoken, not memorialized ...
  5. Adhesion Contract

    A contract in which one party has substantially more power than ...
  6. Breach Of Contract

    Violation of any of the agreed-upon terms and conditions of a ...
Related Articles
  1. Top 6 U.S. Government Financial Bailouts
    Insurance

    Top 6 U.S. Government Financial Bailouts

  2. Tax Withholding: Good For Government, ...
    Taxes

    Tax Withholding: Good For Government, ...

  3. Is The U.S. Government Too Big To Fail?
    Retirement

    Is The U.S. Government Too Big To Fail?

  4. Navigating Government And Nonprofit ...
    Retirement

    Navigating Government And Nonprofit ...

comments powered by Disqus
Hot Definitions
  1. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  4. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  5. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center