Cost-Plus Contract

A cost-plus contract is a contract in which the contractor is reimbursed for the allowable costs it incurs in performing the work, plus an additional fee or profit. Public Services and Procurement Canada (PSPC) describes the resulting price as actual cost plus a fair and reasonable profit. The approach is used mainly where the final cost of the work cannot be fixed in advance. PSPC's response to its review of cost principles sets out this pricing basis.

The Government of Canada's standard clause for this arrangement provides for reimbursement of costs reasonably and properly incurred, plus either a fixed fee or profit, up to a stated ceiling price. Compared with a fixed-price contract, a cost-plus contract places more of the cost risk on the government. The supplier's recovery is limited to costs that are allowable under the contract and the applicable cost principles. The CanadaBuys Standard Acquisition Clauses and Conditions Manual contains the clause.

How the cost-plus clause works

The standard clause is titled "cost reimbursable with fee based on actual costs (cost plus)". It has three working parts. First, the government reimburses costs that were reasonably and properly incurred. Second, the supplier receives a fixed fee or profit on top of those costs. Third, total payments cannot exceed the ceiling price stated in the contract.

The clause also makes payments subject to government audit. It states that the results and findings of the audit are conclusive under the clause. The clause refers to Contract Cost Principles 1031-2, the federal cost principles that define which costs can be claimed.

Cost-plus-a-fixed-fee and cost-plus-a-percentage-of-cost

The term covers two named pricing bases. In cost-plus-a-fixed-fee, reimbursable costs are added to a predetermined fee. In cost-plus-a-percentage-of-cost, the fee is calculated as a percentage of the costs incurred.

The federal Contracting Policy recognizes both as possible pricing bases where the requirement is too difficult to define for meaningful competition. The same policy says the percentage-of-cost basis should be avoided where possible. A fixed fee does not rise as costs rise, which is why it is the preferred form.

Where cost-plus contracts are used in federal procurement

PSPC's supplier guidance says cost-plus contracts are used when there is uncertainty in cost or for longer projects. The guidance is published on the PSPC page on bidding on opportunities.

Cost-based pricing is especially common in defence contracts. PSPC states that it can arise in non-competitive contracts, after a competitive process when negotiation is required, and through contract amendments that affect price. PSPC's summary of its review of cost principles says Canada's contract cost principles and profit policy apply to several procurement types but are particularly relied on in defence procurement.

Federal public accounts report cost-plus contracts separately from ordinary contracts. The reporting threshold cited is $25,000 for cost-plus contracts, compared with $250,000 for other contracts in the referenced reporting context, as shown in the 2023 Public Accounts volume and the 2022 Public Accounts volume.

What a cost-plus contract means for a supplier

A supplier bidding on or negotiating a cost-plus contract should work from the contract's stated cost principles and fee structure. The federal materials support the following practices:

• Price the bid or negotiated proposal using the specified cost principles and fee structure.
• Separate allowable, properly incurred costs from unsupported or disallowed costs.
• Track spending against the ceiling price.
• Keep records that support every cost claimed.
• Expect government audit of reimbursed costs where the clause provides for it.

Suppliers should also check which fee basis the solicitation uses. A fixed fee and a percentage of cost are treated differently under the Contracting Policy, and the percentage basis is the one buyers are told to avoid where possible.