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A cost-plus contract, also termed a cost plus contract, is a contract such that a contractor is paid for all of its allowed expenses, plus additional payment to allow for a profit. [1] Cost-reimbursement contracts contrast with fixed-price contract, in which the contractor is paid a negotiated amount regardless of incurred expenses.
Frank B. Gilbreth, one of the early developers of industrial engineering, used "cost-plus-a-fixed sum" contracts for his building contracting business. [2] He described this method in an article in Industrial Magazine in 1907, comparing it to fixed price and guaranteed maximum price methods. [3]
Cost-plus contracts were first used by the government in the United States during the World Wars to encourage wartime production by American businesses. 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". [4]
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.
| Contract type | U.S. government outlays in FY07 [7] |
|---|---|
| Award-fee contracts | $38 billion |
| Incentive-fee contracts | $8 billion |
| Fixed-fee contracts | $32 billion |
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 used most commonly when the item purchased cannot be defined explicitly, as for research and development, or for cases where there is not enough data to estimate the final cost accurately.
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Between 1995 and 2001 fixed fee cost-plus contracts constituted the largest subgroup of cost-plus contracting in the U.S. defense sector. Starting during 2002 award-fee cost plus contracts became more numerous than 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 had 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 types combined the relative ranking is reversed to the original cost-plus order, meaning that products are most numerous, followed by service and research.
With cost-plus contracting being designed primarily for research and development, cost plus contracts were used in many different efforts unrelated to 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 the programs being subsequent to the research and development state. [10]
Cost accounting is defined by the Institute of Management Accountants as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing,allocating, aggregating and reporting such costs and comparing them with standard costs". Often considered a subset of managerial accounting, its end goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.
Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage to the product's unit cost. Essentially, the markup percentage is a method of generating a particular desired rate of return. An alternative pricing method is value-based pricing.
Build–operate–transfer (BOT) or build–own–operate–transfer (BOOT) is a form of project delivery method, usually for large-scale infrastructure projects, wherein a private entity receives a concession from the public sector to finance, design, construct, own, and operate a facility stated in the concession contract. The private entity will have the right to operate it for a set period of time. This enables the project proponent to recover its investment and operating and maintenance expenses in the project.
In the United States, a group purchasing organization (GPO) is an entity that is created to leverage the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members.
Target costing is an approach to determine a product's life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit. It involves setting a target cost by subtracting a desired profit margin from a competitive market price. A target cost is the maximum amount of cost that can be incurred on a product, however, the firm can still earn the required profit margin from that product at a particular selling price. Target costing decomposes the target cost from product level to component level. Through this decomposition, target costing spreads the competitive pressure faced by the company to product's designers and suppliers. Target costing consists of cost planning in the design phase of production as well as cost control throughout the resulting product life cycle. The cardinal rule of target costing is to never exceed the target cost. However, the focus of target costing is not to minimize costs, but to achieve a desired level of cost reduction determined by the target costing process.
Construction management (CM) aims to control the quality of a project's scope, time, and cost to maximize the project owner's satisfaction. It uses project management techniques and software to oversee the planning, design, construction and closeout of a construction project safely, on time, on budget and within specifications.
The Federal Acquisition Regulation (FAR) is the principal set of rules regarding Government procurement in the United States, and is codified at Chapter 1 of Title 48 of the Code of Federal Regulations, 48 CFR 1. It covers many of the contracts issued by the US military and NASA, as well as US civilian federal agencies.
A purchasing cooperative is a type of cooperative arrangement, often among businesses, to agree to aggregate demand to get lower prices from selected suppliers. Retailers' cooperatives are a form of purchasing cooperative. Cooperatives are often used by government agencies to reduce costs of procurement. Purchasing Cooperatives are used frequently by governmental entities, since they are required to follow laws requiring competitive bidding above certain thresholds. In the United States, counties, municipalities, schools, colleges and universities in the majority of states can sign interlocal agreements or cooperative contracts that allow them to legally use contracts that were procured by another governmental entity. The National Association of State Procurement Officials (NASPO) reported increasing use of cooperative purchasing practices in its 2016 survey of state procurement.
Production sharing agreements (PSAs) or production sharing contracts (PSCs) are a common type of contract signed between a government and a resource extraction company concerning how much of the resource extracted from the country each will receive.
In the United States, the processes of government procurement enable federal, state and local government bodies in the country to acquire goods, services, and interests in real property. Contracting with the federal government or with state and local public bodies enables interested businesses to become suppliers in these markets.
The point of total assumption (PTA) is a point on the cost line of the profit-cost curve determined by the contract elements associated with a fixed price plus incentive-Firm Target (FPI) contract above which the seller effectively bears all the costs of a cost overrun. The seller bears all of the cost risk at PTA and beyond, due to a dollar for dollar decrease in profit beyond the costs at the PTA. In addition, once the costs on an FPI contract reach PTA, the maximum amount the buyer will pay is the ceiling price. Note, however, that between the cost at PTA and when the cost equals the ceiling price, the seller is still in a profitable position; only after costs exceed the ceiling price is the seller in a loss position.
ManTech International Corporation is an American defense contracting firm based in Herndon, Virginia. It was co-founded in 1968 by Franc Wertheimer and George J. Pedersen. The company uses technology to help government and industry clients. The company name "ManTech" is a portmanteau formed through the combination of "management" and "technology."
Construction bidding is the process of submitting a proposal (tender) to undertake, or manage the undertaking of a construction project. The process starts with a cost estimate from blueprints and material take offs.
A cost-plus-incentive fee (CPIF) contract is a cost-reimbursement contract which provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs.
A changes clause, in government contracting, is a required clause in United States government construction contracts.
The mortgage industry of the United Kingdom has traditionally been dominated by building societies, the first of which opened in Birmingham in 1775. But since the 1970s, the share of new mortgage loans market held by building societies has declined substantially. Between 1977 and 1987, the share fell drastically from 96% to 66%, and that of banks and other institutions rose from 3% to 36%. The major lenders include building societies, banks, specialized mortgage corporations, insurance companies and pension funds. During the four years after the financial crisis of 2008, the UK mutual sector provided approximately 80% of net lending to the housing market. There are currently over 200 significant separate financial organizations supplying mortgage loans to house buyers in Britain, with Lloyds Bank and the Nationwide Building Society having the largest market share.
Performance based contracting (PBC), also known as performance-based logistics (PBL) or performance-based acquisition, is a product and services purchasing strategy used to achieve measurable supplier performance. A PBC approach focuses on developing strategic performance metrics and directly relating contracting payment to performance against these metrics. Common metrics include availability, reliability, maintainability, supportability and total cost of ownership. The primary means of accomplishing this are through incentivized, long-term contracts with specific and measurable levels of operational performance defined by the customer and agreed on by contracting parties. The incentivized performance measures aim to motivate the supplier to implement enhanced practices that offer improved performance and cost effective. This stands in contrast to the conventional transaction-based, or waterfall approach, where payment is related to completion of milestones and project deliverables. In PBC, since a part or the whole payment is tied to the performance of the provider and the purchaser does not get involved in the details of the process, it becomes crucial to define a clear set of requirements to the provider. Occasionally governments fail to define the requirements clearly. This leaves room for providers, either intentionally or unintentionally, to misinterpret the requirements, which creates a game like situation.
A fixed-price contract is a type of contract for the supply of goods or services, such that the agreed payment amount will not subsequently be adjusted to reflect the resources used, costs incurred or time expended by the contractor. This contract type may be contrasted with a cost-plus contract, which is intended to cover the costs incurred by the contractor plus an additional amount for profit, and with time-and-materials contracts and labor-hour contracts. Fixed-price contracts are one of the main options available when contracting for supplies to governments.
Australian Construction Contracts govern how the parties to a construction contract behave and how the project manager and the contract manager administer the relationship between the parties. There are several popular standard forms of construction contracts that are currently used in Australia.
A construction contract is a mutual or legally binding agreement between two parties based on policies and conditions recorded in document form. The two parties involved are one or more property owners and one or more contractors. The owner, often referred to as the 'employer' or the 'client', has full authority to decide what type of contract should be used for a specific development to be constructed and to set out the legally-binding terms and conditions in a contractual agreement. A construction contract is an important document as it outlines the scope of work, risks, duration, duties, deliverables and legal rights of both the contractor and the owner.
