Cost - plus contract - wikipedia Cost - plus contract `` Cost - plus '' redirects here. For the pricing technique, see cost - plus pricing. A cost - plus contract, also termed a cost reimbursement contract, is a contract where a contractor is paid for all of its allowed expenses, plus additional payment to allow for a profit. Cost - reimbursement contracts contrast with fixed - price contract, in which the contractor is paid a negotiated amount regardless of incurred expenses. Contents 1 History 2 Types 3 Usage 4 Pros and cons 5 Recent trends 6 See also 7 References 8 External links History Frank B. Gilbreth, one of the founders of industrial engineering, used `` cost - plus - a-fixed sum '' contracts in his building contracting business. He described this method in an article in Industrial Magazine in 1907, comparing it to fixed price and guaranteed maximum price methods. Cost - plus contracts first came into use by the government in the United States during the World Wars to encourage wartime production by large American companies. According to Martin Kenney, they `` allowed what were then small technology firms like Hewlett - Packard and Fairchild Semiconductor to charge the Department of Defense for the price of research and development that none could pay on its own. This enabled the firms to create technology products that eventually created entire new markets and economic sectors ''. Types There are four general types of cost - reimbursement contracts, all of which pay every allowable, allocatable, and reasonable cost incurred by the contractor, plus a fee or profit which differs by contract type. Cost plus fixed - fee ( CPFF ) contracts pay a pre-determined fee that was agreed upon at the time of contract formation. Cost - plus - incentive fee ( CPIF ) contracts have a larger fee awarded for contracts which meet or exceed performance targets, including any cost savings. Cost - plus - award fee ( CPAF ) contracts pay a fee based upon the contractor 's work performance. In some contracts, the fee is determined subjectively by an awards fee board whereas in others the fee is based upon objective performance metrics. An aircraft development contract, for example, may pay award fees if the contractor achieves certain speed, range, or payload capacity goals. Cost plus percentage of cost pay a fee that rises as the contractor 's cost rise. Because this contract type provides no incentive for the contractor to control costs it is rarely utilized. The U.S. Federal Acquisition Regulations specifically prohibit the use of this type for U.S. Federal Government contracting ( FAR Part 16.102 ). Contract type U.S. government outlays in FY07 Award - fee contracts $38 billion Incentive - fee contracts $8 billion Fixed - fee contracts $32 billion Usage A cost - reimbursement contract is appropriate when it is desirable to shift some risk of successful contract performance from the contractor to the buyer. It is most commonly used when the item purchased can not be explicitly defined, as in research and development, or in cases where there is not enough data to accurately estimate the final cost. Pros and cons Advantages : A cost - plus contract is often used when performance, quality or delivery time is a much higher concern than cost, such as in the United States space program. Final cost may be less than a fixed price contract because contractors do not have to inflate the price to cover their risk, especially when the ability to estimate costs is low. Final cost may be less than a fixed price contract when there is little market or price competition. Allows more oversight and control over the quality of the contractor 's work. Flexible, allowing for changes in specification. Disadvantages : There is limited certainty as to what the final cost will be. Requires additional oversight and administration to ensure that only permissible costs are paid and that the contractor is exercising adequate overall cost controls. Recent trends Between 1995 and 2001 fixed fee cost - plus contracts constituted the largest subgroup of cost - plus contracting in the U.S. defense sector. Starting in 2002 award - fee cost plus contracts took over the lead from fixed fee cost plus contracts. The distribution of annual contract values by sector category and award types indicates that cost plus contracts in the past carried the largest importance in research, followed by services and products. In 2004, however, services replaced research as the dominant sector category for cost - plus contracts. For all other contract vehicles combined the relative ranking is reversed to the original cost - plus order, meaning that products lead, followed by service and research. With cost - plus contracting being primarily designed for research and development, the percentage of cost - plus contracting within a contract is expected to be correlated to the percentage share of research undertaken in any given program. However, several programs, such as the Lockheed Martin F - 35 Lightning II, UGM - 133 Trident II, CVN - 68, and the CVN - 21 deviate from this pattern by continuing to make extensive usage of cost - plus contracting despite programs progressively moving beyond the research and development state. See also Cost engineering Cost - plus pricing References ^ Jump up to : Cost - Plus Contracts Center for Strategic and International Studies Jump up ^ Lancaster, Jane ( 2004 ). Making Time : Lillian Moller Gilbreth, a Life Beyond `` Cheaper by the Dozen ''. Northeastern University Press. p. 79. ISBN 978 - 1 - 55553 - 612 - 1. Jump up ^ Gilbreth, Frank B. ( 1907 ). `` The ' Cost - Plus - a-Fixed - Sum ' Contract ''. Industrial Magazine. 6 : 31 -- 37. Jump up ^ Kenney, Martin ( 2 July 2014 ). `` Silicon Valley 's Spy Problem ''. Project Syndicate. Jump up ^ Defense Industrial Initiative Group - Current Issues : Cost Plus Contracting ^ Jump up to : Poole, Walter S. ( 2013 ). Adapting to Flexible Response 1960 - 1968. History of Acquisition in the Department of Defense. Washington, DC : Cambridge University Press. pp. 50 -- 52, 76 -- 85. ISBN 978 - 0 - 16 - 092183 - 4. OCLC 877851275. Jump up ^ Defense Industrial Initiatives Group - Cost - plus Contracting Narrated Slide Show Archived 2009 - 04 - 17 at the Wayback Machine. External links The Federal Procurement Data System The central repository for U.S. Government contract information. Defense Industrial Initiatives Group - Cost - plus Contracting Narrated Slide Show Contract types Fixed - price contract Cost reimbursement contract Time and materials contract Retrieved from `` https://en.wikipedia.org/w/index.php?title=Cost-plus_contract&oldid=795320335 '' Categories : Business terms Contract law Pricing Procurement practices Hidden categories : Webarchive template wayback links Talk Contents About Wikipedia Čeština Français עברית Edit links This page was last edited on 13 August 2017, at 13 : 41. Text is available under the Creative Commons Attribution - ShareAlike License ; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia ® is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization. About Wikipedia

Question: when should a cost plus contract be used
Answer: when it is desirable to shift some risk of successful contract performance from the contractor to the buyer