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A cost-plus contract includes the cost of goods sold (COGS), including materials and labor, as well as overhead, such as administrative costs, insurance, permits, transportation and utilities. A cost-plus contract also stipulates the contractors profit, typically a fixed fee or percentage of the project total.
Cost-plus contracts are similar to lump sum contracts in that the owner agrees to pay the contractors costs, including labor, subcontractors, equipment and materials and an amount for the contractors profit and overhead. But instead of a lump sum to cover all the expenses, those costs are reimbursed individually.
A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractors cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss.
If the Actual Cost is higher than the Target Cost, say 1,100, the client will pay: 1,100 + 100 + (1,000 - 1,100) * 0.2 = 1,180 (contractor earns 80). If the Actual Cost is lower than the Target Cost, say 900, the client will pay: 900 + 100 + (1,000 - 900) * 0.4 = 1,040 (contractor earns 140).
Some advantages of a CPFF contract can include: The final cost may be lower than in a normal contract, as the contractor usually will not inflate prices to cover risks. The contractor also has less incentive to control the project costs (in contrast to other types of contracts, such as a fixed-price contract)
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People also ask

A fixed-price contract is a contract where the agreed-upon price for the job is unchanged throughout the project. It doesnt matter if more time, materials or labor must be used than first estimated, the price stays the same. Its one of the more straightforward construction contracts.
Budget: A fixed-price contract is just that: fixed. The agreed-on price at the beginning of the project is the price at the end. Conversely, a cost-plus contract estimates a projects costs but doesnt set the final price until the project is completed.
Expenses may also include overhead, such as the cost of research and development required to meet contractual obligations. However, most cost-plus contracts do not cover estimating errors, mistakes, or costs incurred due to negligence. The customer may occasionally request a cap on total chargeable expenses.
What Is a Cost-Plus Contract? A cost-plus contract is one in which the contractor is paid for all of a projects expenses plus an additional fee for the job. The additional fee is intended to be the contractors profit.
The cost-plus agreement is a good option when building and design plans are still fluid and time is a crucial factor in getting a project started.

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