In project management, there are different types of contracts that buyers and sellers should be aware of. Among the many contractual agreements is the cost-plus contract. Also called the cost reimbursement contract, this type of contractual agreement pays the contractor all allowed expenses plus an additional payment for extra profit.
There are four types of cost-plus contracts by which all provides an additional profit. The cost-plus-percentage of a cost is a type of contract that requires the buyer to reimburse all legitimate project costs towards the seller. Aside from reimbursing costs, the buyer also needs to pay a percentage cost as stipulated and agreed upon in the contract. This type of contract raises the additional fee as the cost of the contractor rises. This type of contractual agreement does not provide any incentive to the contractor to the cost that it does not or rarely utilize. Moreover, it is also rarely used by many sellers because it provides little to no motivation for them to keep the cost low.
This type of contract provides longer time quality delivered by the seller and the final cost may be less than the fixed price contract agreement. However, it is important to provide additional administration in order to ensure that only the permissible costs are paid. The project manager needs to make sure that the project management activities are exercising adequate overall costs.
This type of contractual agreement is appropriate when it is desirable to shift some risk of the contract performance from the contractor to the buyer. This type of contract is used when the item that is purchased cannot be defined or when the data to estimate the cost is not appropriate. In most cases, this type of contract is applicable in research and development.
This term is defined in the 5th edition of the PMBOK.