Cost-Plus (Cost-Reimbursement) Contracts
Understand Cost-Plus and cost-reimbursement government contracts. Learn about CPFF, CPIF, CPAF structures, allowable costs, and how to manage cost-type contracts.
Cost-reimbursement contracts, commonly called cost-plus contracts, provide for payment of allowable incurred costs plus a fee representing profit. These contracts are used when the government cannot define requirements precisely enough to allow fixed-price contracting. The government bears most of the cost risk, paying actual costs regardless of original estimates. In exchange, contractors accept more government oversight, cost auditing, and limitations on profit. Cost-plus contracts are common for research and development, complex systems development, and services where scope cannot be precisely defined upfront.
- Research and development projects with uncertain outcomes
- Complex system development with evolving requirements
- When circumstances do not permit accurate cost estimation
- Emergency response where speed is critical
- Study and analysis projects with undefined scope
- +Reduced contractor cost risk
- +Flexibility to adapt to changing requirements
- +Appropriate for uncertain or evolving work
- +Reimbursement of actual allowable costs
- +May be required for certain R&D or complex work
- -Lower profit potential compared to FFP
- -Extensive government oversight and auditing
- -Complex cost accounting requirements
- -Detailed cost reporting and documentation
- -Must maintain approved accounting system
- -Indirect rate ceilings may limit reimbursement
Cost-reimbursement contracts come in several forms based on how fee (profit) is determined.
Cost-Plus-Fixed-Fee (CPFF):
- Most common cost-reimbursement type
- Fee is fixed at contract award and does not change
- Fee expressed as dollar amount (not percentage of actual cost)
- Fee can only change if scope significantly changes
- Provides modest incentive for cost control
Cost-Plus-Incentive-Fee (CPIF):
- Fee varies based on cost performance vs. target
- Contract specifies target cost, target fee, and share ratios
- If actual costs are below target, contractor earns higher fee
- If actual costs exceed target, fee decreases
- Creates stronger incentive for cost control than CPFF
Cost-Plus-Award-Fee (CPAF):
- Fee based on government evaluation of contractor performance
- Contract specifies base fee (minimum) and award fee pool
- Award fee determined periodically by government evaluation
- Evaluation criteria include cost, schedule, technical performance
- Provides subjective incentive for excellent performance
Cost-Plus-Percentage-of-Cost (CPPC):
- Fee is percentage of actual costs
- Prohibited for federal contracts
- Creates perverse incentive to increase costs
- Sometimes seen in commercial or state/local contracts
Cost Contract (No Fee):
- Government reimburses costs only, no profit
- Used primarily with nonprofits and universities
- May include provisions for cost sharing
Key Tips:
- CPFF is most common and simplest to administer
- CPIF rewards cost efficiency but requires more cost tracking
- CPAF requires careful attention to evaluation criteria throughout performance
- Understand which cost-plus type before developing your proposal strategy
On cost-plus contracts, only "allowable" costs are reimbursed. Understanding allowability is critical.
Cost Allowability Factors (FAR 31.201-2):
For a cost to be allowable, it must be:
Categories of Unallowable Costs:
- Advertising (except recruiting, certain technical)
- Alcoholic beverages
- Bad debts
- Contributions and donations
- Entertainment
- Fines and penalties
- Interest (in most cases)
- Lobbying
- Losses on other contracts
- Personal expenses
Direct vs. Indirect Costs:
- Direct costs: Charged directly to contract (labor, materials)
- Indirect costs: Allocated across contracts (overhead, G&A)
- Indirect costs subject to negotiated rates and ceilings
Cost Principles by Contractor Type:
- Commercial contractors: FAR Part 31
- Educational institutions: 2 CFR 200 (Uniform Guidance)
- Nonprofits: 2 CFR 200
- State/local governments: 2 CFR 200
Key Tips:
- Maintain separate accounts for unallowable costs
- When in doubt, ask your DCAA auditor before incurring costs
- Document the business purpose of all significant expenses
- Understand indirect rate ceilings in your contract
Cost-plus contracts require robust cost accounting systems to track and report costs accurately.
Adequate Accounting System:
To perform cost-type contracts, contractors must have an accounting system deemed adequate by DCAA (Defense Contract Audit Agency) or cognizant auditor. The system must:
- Segregate direct and indirect costs
- Accumulate costs by contract
- Distinguish allowable from unallowable costs
- Maintain timekeeping records for labor
- Allocate indirect costs consistently
- Support billing and payment
Cost Accounting Standards (CAS):
Contractors with significant government business must follow CAS:
- CAS-covered contracts: Over $7.5 million or meet other thresholds
- Modified CAS coverage: Smaller contracts, fewer standards apply
- Full CAS coverage: Large contracts, all standards apply
- Key standards address cost allocation, consistency, and disclosure
DCAA Audits:
DCAA conducts various audits on cost-plus contractors:
- Incurred cost audits: Verify actual costs are allowable
- Forward pricing audits: Review proposed costs before award
- Accounting system audits: Assess system adequacy
- CAS compliance audits: Verify CAS adherence
Indirect Rate Structure:
Cost-plus contractors maintain pools of indirect costs:
- Fringe benefits: Employee benefits pool
- Overhead: Costs supporting direct work
- G&A: General business expenses
- Rates are negotiated annually with auditor
Key Tips:
- Invest in accounting system before pursuing cost-plus contracts
- Maintain excellent records - auditors will review everything
- Work cooperatively with DCAA auditors while protecting your interests
- Consider hiring experienced government contract accountants
Cost-plus contracts require diligent cost management despite reduced cost risk.
Budgeting and Estimation:
Even though costs are reimbursed, you must:
- Develop realistic cost estimates
- Track actual costs against estimates
- Explain variances to government
- Request additional funding if needed before cost overruns
Government Oversight:
Cost-plus contracts have significant oversight:
- Contracting Officer (CO) monitors performance
- Contracting Officer Representative (COR) provides technical oversight
- DCAA may conduct ongoing audits
- Government may have access to records and facilities
Reporting Requirements:
- Monthly cost reports: Actual costs vs. budget
- Progress reports: Technical progress updates
- Problem notifications: Early warning of issues
- Incurred cost submissions: Annual detailed cost reports
Fee Payment:
- CPFF: Fee typically paid as percentage of costs incurred, with remainder at completion
- CPIF: Fee calculated after final costs determined
- CPAF: Award fee determined by evaluation board periodically
Funding Considerations:
Cost-plus contracts are incrementally funded:
- Government provides funding in increments
- Contract ceiling may exceed current funding
- Contractor cannot exceed funded amount
- Monitor funding levels carefully
Key Tips:
- Track costs weekly and compare to funding levels
- Communicate funding concerns early - don't run out unexpectedly
- Build strong relationships with COR and CO through transparent communication
- Maintain meticulous records to support all costs charged
- 1Advanced weapons system R&D with significant technical uncertainty
- 2Medical research study where scope depends on findings
- 3Complex software development with evolving requirements
- 4Emergency response services where work cannot be predicted
- 5Scientific studies requiring flexibility to follow research findings
What is the difference between cost-plus and fixed-price contracts?
On fixed-price contracts, the contractor is paid an agreed price regardless of actual costs. On cost-plus contracts, the contractor is reimbursed for allowable actual costs plus a fee. Fixed-price transfers cost risk to contractor; cost-plus keeps risk with government.
How is profit (fee) determined on cost-plus contracts?
Fee varies by contract type. CPFF has a fixed dollar fee set at award. CPIF fee varies based on actual cost performance vs. target. CPAF fee is determined by government evaluation of performance. In all cases, fee is limited and much lower than potential fixed-price profits.
What costs are not reimbursable on cost-plus contracts?
FAR Part 31 specifies many unallowable costs including advertising, entertainment, alcoholic beverages, lobbying, fines, interest, and executive compensation above certain limits. Costs must also be reasonable, allocable, and compliant with contract terms.
Do I need a special accounting system for cost-plus contracts?
Yes. You need an accounting system deemed adequate by DCAA. The system must segregate costs by contract, distinguish direct/indirect costs, track allowable/unallowable costs, and support accurate billing. Many contractors invest significantly in systems before pursuing cost-plus work.
How do I get paid on a cost-plus contract?
You submit invoices (typically monthly) for allowable costs incurred plus provisional fee. The government pays invoices after review. Final fee on CPIF/CPAF is determined after completion. All costs are subject to audit, and payments may be adjusted based on audit findings.
Why would a contractor prefer cost-plus over fixed-price?
Cost-plus reduces cost risk when work cannot be accurately estimated. For R&D or complex development, cost-plus protects contractors from cost overruns while allowing focus on technical performance rather than cost control. However, profit potential is lower.
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