Contracting cost plus profit

Cost Plus Profit contract all costs incurred by the contractor are reimbursed in full, and the contractor then adds an agreed percentage as a profit fee. 

The more serious accusations of profiteering were investigated by the Treasury in the light of the most recent summary of costs, which had risen by April, 1942, to 8,578,702. It was explained that due to the previously untried nature of the work the MAP initially awarded contracts on a costs plus profit basis, which in wartime was a notorious licence to print money. About half of the contracts were later renegotiated on a scheduled cost basis, 80% of which involved a bonus incentive, (80% of which was achieved). 

The contractor can not lose on a cost-plus contract. However, if he ever wants another contract with the company he had better make certain costs are controlled. When there is a lot of construction under way and all contractors are busy, they will increase their profit margin on any firm bids. Under these conditions, a cost-plus contract may be advantageous. 

Private industry would perform all operations on cost-plus contracts, thus eliminating potential conflicts between safety and profits. 

An extreme example has been the U.S. defense industry. Product functionality has traditionally reigned supreme over the cost of the weapon system. As one might expect, this has led to highly capable, but very costly, weaponry. Because new weapon programs have been governed by cost plus contracts, there has been little discipline over this process. In fact, the way profits are calculated, higher cost can mean higher profits. 

Conversely, on a reimbursable-plus-percent-fee contract, the contractor could overstaff and/or pay overtime in the name of schedule compliance. The result would be an increase in contractor s cash flow and profits but the improvement in the schedule, if any, may not justify the extra cost to the client. However, this situation would be avoided with a clause requiring prior client s approval to premium pay and staffing the job beyond the approved plan. 

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