Cost-Plus-Contracts

Leezer Kaur
Apr 19, 2023
3 min read

“Written by Leezer Kaur, a 3rd-year B.A.LL.B. student at Army Institute of Law, Mohali”

Introduction

It is also known as a ‘cost-reimbursement contract’. It is mainly a type of contract whereby a customer agrees to reimburse the contractor for the expenses incurred by him in the completion of the work assigned, along with some incentives and profits. It is most suitable for those customers who don’t have much knowledge as to how to go about a particular work and also have a fixed budget to get their work accomplished, like in construction and painting contracts. However, there can be slight variations in the budget as well.

Types

Cost-Plus-Percentage of cost contracts: it is the most common type of cost-plus contract undertaken mainly in construction and research projects. In this, all the project costs are covered along with the profit margin for the person undertaking the contract.
Cost-Plus-Fixed-Fee contracts: these provide a fixed reimbursement price to the contractor, and the contractor is supposed to adjust the expenses accordingly.
Cost-Plus-Fixed-Fee with guaranteed maximum price contracts: in this, the contractor is provided with the reimbursement as per the requirements, but there is a maximum cap of costs provided beyond which no payment shall be made.
Cost-Plus-Award Fee contracts: in this, a fixed amount of reimbursement is to be provided to the contractor but in case of exceptionally outstanding performance, an additional amount as an award can also be paid.
Cost-Plus-Incentive Fee contracts: These involve negotiable initial fees along with predetermined fees for meeting any of the decided targets.

Features of Cost- Plus-Contracts

There are three components included in such contracts, which are direct expenses incurred by the contractor in completion of the work, any overhead costs like rent, travel charges, and legal expenses incurred during the task completion, along with profits and additional incentives for faster completion of work, etc.
It is most commonly used in construction, renovation, and painting-related contracts.
It involves lesser risk on the part of the contractor with respect to any uncertainty, which may give rise to additional costs and provides more flexibility.
It allows the contractors to use their expertise without bothering about the amount of money. That is why; it is mostly used in Research and Development projects being carried on in the USA and ensures higher efficiency and performance.
It is best to use this type of contract when there is a restricted budget or non-estimated budget and also if there is no urgency with respect to early completion of the work so as to allow the contractor to give his best performance in work.

Particulars to be provided under it

Such agreements may provide for:

The nature of work or task to be completed by the contractor.
The maximum duration or the last date by which the contractor is supposed to finish the task assigned to him.
The maximum cap of payment, if any, will be provided to the contractor.
It may also specify the profit percentage or the amount to which the contractor would be entitled.
It may also specify any additional incentives which the contractor may be provided for faster completion of the task or completion in an outstanding manner.
It may also specify the rights and duties of both parties to the agreement.
It can also provide payment schedules.
It may also specify the dispute resolution system in case of any dispute between both parties to dispute.
It may also provide for the conditions on fulfilment of which the contract could be rescinded.
It may also provide for any provision which may require the keeping of any particular information confidential by the parties during the course of the agreement.

Conclusion

Cost-Plus-Contracts are the contracts whereby the contractor is assigned a task to be completed and for that, he is reimbursed with the direct costs incurred by him, the overhead costs which may arise during the course of work, and the profits which are supposed to be given to the contractor for performance of the contract. Sometimes, it may also provide for the maximum cap of the costs, which would be provided to the contractor for the completion of the task. It is mostly used in Research and Development projects in the USA and in construction, painting, and renovation tasks where the customer has no knowledge as to how to go about a particular task and also as to what would be the overall expenses of the task.

References

'Cost-plus-contracts', Wikipedia, available at: https://en.wikipedia.org/wiki/Cost-plus_contract.