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.

BREAKING DOWN '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. Insurance

    Top 6 U.S. Government Financial Bailouts

    U.S. bailouts date all the way back to 1792. Learn how the biggest ones affected the economy.
  2. Taxes

    Tax Withholding: Good For Government, Bad For Taxpayers

    It's important to understand where that money coming out of your paycheck goes and why - after all, you earned it.
  3. Retirement

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

    Some think that the U.S. government is too big to fail, but one must only look at historical examples to know that it's not true.
  4. Retirement

    Navigating Government And Nonprofit Financial Statements

    Learn how to trace where your tax dollars and charitable donations are going.
  5. Taxes

    Tax-Free Accounts Make Saving A Snap For Canadians

    In 2009, the Canadian government began allowing citizens to save more tax-free dollars than ever.
  6. Economics

    Understanding Switching Costs

    Consumers incur switching costs when they receive a monetary or other type of penalty for changing a supplier, brand or product.
  7. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  8. Investing Basics

    What's a Price-Taker?

    Price-taker is an economic term describing a market participant who has no effect on overall market activity.
  9. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  10. Economics

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
RELATED FAQS
  1. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  2. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  3. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. How can I find net margin by looking a company's financial statements?

    In finance and accounting, financial statements represent the fundamental means of analyzing a company's financial position, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  2. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  3. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  4. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  5. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  6. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!