Question 1

When should I use a cost-plus contract instead of fixed price?

Accepted Answer

Use cost-plus when the scope isn't clearly defined yet — research projects, renovations with unknown conditions, or early-stage product development. Fixed-price works better when you know exactly what you need. Cost-plus gives flexibility; fixed-price gives budget certainty. Most of the time, clients prefer fixed-price for the predictability.

Question 2

How do I prevent cost overruns on a cost-plus contract?

Accepted Answer

Include a cost ceiling (or 'not-to-exceed' clause) that caps total reimbursable costs. Require regular cost reporting — weekly or bi-weekly — and approval before major purchases. Define what counts as a reimbursable cost and what doesn't. Without these controls, costs can balloon because the contractor has little incentive to be frugal.

Question 3

What's the difference between cost-plus-fixed-fee and cost-plus-percentage?

Accepted Answer

Cost-plus-fixed-fee means the contractor earns the same fee regardless of total costs — $20,000 whether the project costs $50K or $150K. Cost-plus-percentage means the fee grows with costs — 15% of $50K is $7,500, but 15% of $150K is $22,500. Fixed-fee gives the contractor less incentive to inflate costs.

Question 4

What happens if a cost-plus project costs more than expected?

Accepted Answer

Without a cap, you pay the full amount. That's the risk of cost-plus contracts. With a 'not-to-exceed' clause, costs stop at the cap and the contractor absorbs anything beyond that. Always negotiate a cap — it combines the flexibility of cost-plus with the budget protection of fixed-price.

Question 5

Can I audit costs under a cost-plus contract?

Accepted Answer

You should — and your contract should give you the right to. Include an audit clause requiring the contractor to provide receipts, invoices, and time records. Without audit rights, you're trusting the contractor's math entirely. Most cost-plus contracts include audit provisions as standard.

Cost-Plus Contract

Definition

In Practice

Common in these contract types

Related terms

Related contract clauses

Related articles

Frequently asked questions about cost-plus contract

Create a contract with proper cost-plus contract clauses