Cost-plus contract

Cost-plus (reimbursable) contracting is what parties use when a fixed price would be a guess: scope still forming, schedule too urgent to wait for definition, or conditions too uncertain to price. The contractor opens its books, the owner pays what the work actually costs plus the fee, and the risk of cost outcomes sits with the owner — along with the obligation to run the audit, verification and control machinery that reimbursement demands.

The fee structure carries the incentives, and choosing it is the real contract design. A percentage fee rewards spending; a fixed fee is neutral; incentive structures — target costs with shared over- and under-runs, or a guaranteed maximum price capping the owner's exposure — attempt to rebuild the efficiency motive that the lump sum provides for free.

The model's failures are definitional and cultural. Definitional: "reimbursable cost" must be specified to the level of timesheets, rates, and what is inside the fee, or every invoice becomes a negotiation. Cultural: cost-plus with a passive owner is a project with no one minding the money — the contract form that most rewards owner capability is the one most often chosen by owners who lack it.