Contracting 101: Cost-Reimbursement and Cost-Plus Contracts

See the latest from GovWin web editor Lindley Ashline:

Cost-reimbursement, or cost-plus, is a type of contract where a contractor is paid for all of its allowed expenses up to a set limit, plus additional payment to allow the company to make a profit.

Cost-reimbursement contracts contrast with fixed-price contracts, in which the contractor is paid a negotiated amount regardless of incurred expenses.

Under a cost-reimbursement contract, the contractor agrees to provide its best effort to complete the required contract. These contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. They include an estimate of total cost to obligate funds and establish a ceiling that the contractor cannot exceed (except at its own risk) without the approval of the contracting officer.

Cost-reimbursement contracts may be used only when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.

(Image: Receipts, a Creative Commons Attribution (2.0) image from stevensnodgrass’s photostream)

According to Federal Computer Week, federal agencies spend about $136 billion in cost-reimbursement contracts per year. Between 1995 and 2001, fixed-fee cost-reimbursement contracts constituted the largest subgroup of cost-plus contracts in the U.S. defense sector. Starting in 2002, award-fee cost-reimbursement contracts took the lead.

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