Cost-Plus Contracts in Government Contracting: An In-Depth Guide

Cost-plus contracts, also known as cost-reimbursement contracts, are a cornerstone of government contracting, especially when the scope of work cannot be precisely estimated at the start. These agreements shift the financial risk from contractors to the government, making them a preferred choice in research and development (R&D) projects or scenarios with high uncertainty.

This guide explores who uses cost-plus contracts, their different types, compliance requirements as well as key advantages and disadvantages.

In This Article:

• What is a Cost-Plus Contract?
• Who Uses Cost-Plus Contracts?
• Types of Cost-Plus Contracts
• Government Compliance Requirements for Cost-Plus Contracts
• Annual Incurred Cost Submissions
• Advantages and Disadvantages of Cost-Plus Contracts
• How to Prepare for a Cost-Plus Contract
• How to Use GovWin IQ to Find Cost-Plus Contracts
• How Deltek Costpoint Can Help with Managing Cost-Plus Contracts

A cost-plus contract reimburses the contractor for allowable costs related to the project, with an additional fee for profit. Unlike fixed-price contracts, where the contractor assumes all financial risk, cost-plus contracts pass this risk to the government. Time and materials (T&M) contracts differ as they pay for labor and materials directly but don't account for additional costs like indirect expenses.

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Cost-plus contracts are commonly used in industries with unpredictable costs or long-term projects. They are popular in sectors such as:

• Construction: Especially in large-scale projects, cost-plus contracts allow flexibility for unexpected expenses.
• Defense and Aerospace: Given the complexity and evolving nature of projects, cost-plus contracts are a natural fit.
• Research and Development: When outcomes are uncertain, these contracts are ideal.

U.S. Government Use of Cost-Plus Contracts

The U.S. government extensively uses cost-plus contracts in areas such as military development, healthcare, and infrastructure.

These contracts are governed by the Federal Acquisition Regulation (FAR) Part 16, which outlines the guidelines for selecting the appropriate contract type based on project circumstances.

FAR Part 16 outlines the policies and procedures for the use of different contract types, including cost-plus contracts. The regulation provides detailed guidance on when and how these contracts should be used.

Cost-plus contracts come in various forms, each tailored to different project needs:

• Cost-Plus-Fixed-Fee (CPFF): Contractors are reimbursed for costs and receive a fixed fee regardless of project performance.
• Cost-Plus-Incentive-Fee (CPIF): In addition to cost reimbursement, contractors earn a performance-based fee, motivating efficiency.
• Cost-Plus-Award-Fee (CPAF): The contractor’s fee is awarded based on government evaluation of project performance.
• Cost-Plus-Percentage of Cost (CPPC): Contractors are paid a percentage of the costs incurred, but this type is generally prohibited in federal contracts due to the lack of incentive for cost control.

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Managing cost-plus contracts involves rigorous adherence to federal regulations, particularly the FAR and Cost Accounting Standards (CAS). Contractors must ensure their accounting systems can trace both direct and indirect costs, and they are subject to annual incurred cost submissions.

What Types of Costs are Reimbursed on Cost-Plus Contracts?

Understanding reimbursable costs is crucial for compliance:

• Direct Costs: Expenses directly related to contract performance, such as labor, materials, and subcontractor costs.
• Indirect Costs: Overhead expenses that benefit multiple projects, like facility rent and administrative salaries.
• Unallowable Costs: Some costs are not reimbursed by the government, including entertainment, lobbying and alcohol. These are detailed in the FAR Part 31.

Incurred Cost Submissions (ICS) are a critical component of managing cost-plus contracts, as they serve as a formal report detailing the actual costs incurred by a contractor during the performance of a contract. These submissions are required annually and are subject to audit by the Defense Contract Audit Agency (DCAA) to ensure that contractors are accurately billing the government for allowable costs. The purpose of the incurred cost submission is to provide transparency and accountability, ensuring that the government is only reimbursing contractors for legitimate, allowable expenses.

What Does an Incurred Cost Submission Include?

An incurred cost submission typically includes several schedules that break down both direct and indirect costs incurred over the course of the contract. These schedules must be reconciled with the contractor’s accounting records to ensure accuracy. Some key schedules in the submission include:

• Schedule A: Summary of Claimed Indirect Expense Rates
• Schedule B: General and Administrative (G&A) Expenses
• Schedule H: Direct Costs by Contract/Subcontract Applied at Claimed Rates
• Schedule I: Cumulative Direct and Indirect Costs Claimed and Billed

These schedules give the government insight into how the contractor allocates direct and indirect costs, ensuring that the contractor adheres to federal regulations, such as FAR Part 31, which outlines allowable and unallowable costs.

Why Are Incurred Cost Submissions Important in Cost-Plus Contracts?

For cost-plus contracts, incurred cost submissions are critical because the contractor is reimbursed based on actual costs incurred rather than a pre-agreed price. The government needs detailed documentation to verify that the contractor is billing only for allowable, legitimate costs. The incurred cost submission ensures that:

• Costs are allocable to the contract.
• Allowable costs are being charged according to FAR and CAS.
• Indirect cost rates applied during contract performance are accurate and fair.

Failure to submit an accurate and timely incurred cost submission can result in delayed payments, disallowed costs, or even contract termination. Contractors may also face penalties or other enforcement actions if they submit inaccurate information.

Advantages:

• Reduced Financial Risk: Contractors are reimbursed for all allowable costs, minimizing the risk of financial loss.
• Flexibility: This is especially useful in uncertain or high-risk projects, like R&D, where costs are hard to predict.
• Responsive Cash Flow: Payments are made as costs are incurred, allowing for a steady cash flow.

Disadvantages:

• Increased Administrative Burden: Contractors must maintain rigorous cost-tracking and reporting systems to meet government audit requirements.
• Higher Government Surveillance: The government closely monitors these contracts to ensure costs are allowable and justified.
• Potential for Reduced Profit Margins: The cost-plus structure might limit the contractor's ability to maximize profits.

Securing and managing cost-plus contracts requires robust business systems and processes. Below are key steps to prepare:

• Invest in a Government-Compliant Accounting System: Ensure your system supports the detailed cost tracking needed for incurred cost submissions.
• Familiarize Yourself with FAR and CAS: Being well-versed in these regulations is crucial to winning and managing cost-plus contracts.
• Ensure Audit Readiness: Be prepared for regular audits by the DCAA, ensuring that all cost reports are accurate and compliant.

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Managing cost-plus contracts can be challenging due to the need for strict cost tracking, compliance with federal regulations and complex audit requirements.

Deltek Costpoint is a comprehensive ERP solution designed specifically for government contractors. It provides robust tools to streamline and simplify the management of cost-plus contracts, from cost tracking and allocation to audit readiness and compliance.

With automation, robust reporting tools and built-in compliance support, contractors can use Deltek Costpoint to confidently manage even the most complex cost-plus contracts, improving their cash flow, reducing administrative burden and enhancing their ability to win future government contracts.

Automated Cost Allocations and Compliance Support

Costpoint automates the allocation of direct and indirect costs across multiple projects, ensuring that all costs are accurately tracked and assigned. The system provides out-of-the-box segregation of costs, distinguishing between allowable, unallowable, direct and indirect costs, which is crucial for FAR and CAS compliance. This automated functionality reduces manual work and ensures transparency, making it easier to handle complex contract requirements such as indirect cost pools, cost accumulation and incurred cost submissions.

Key Benefit: Reduces the risk of human error and ensures that all cost allocations meet the stringent requirements of DCAA and other regulatory bodies.

Streamlined Incurred Cost Submission and Audit Readiness

Costpoint simplifies the process of preparing annual incurred cost submissions, a requirement for most cost-plus contracts. The software comes with pre-built reports such as the Incurred Cost Submission Report, which provides detailed visibility into all direct and indirect costs claimed on government contracts. In addition, Costpoint maintains audit trails for every transaction, ensuring traceability and compliance with audit requirements.

Key Benefit: Contractors can be audit-ready at all times, with built-in support for DCAA and DCMA audits, reducing the likelihood of audit findings or penalties.

Enhanced Billing and Cash Flow Management

Managing cash flow under cost-plus contracts can be difficult due to the complexity of invoicing and the need to accurately calculate provisional rates. Costpoint automates the calculation of provisional and actual rates, ensuring that contractors only bill allowable costs and receive payments more efficiently. Additionally, digital payments through platforms like iRAPT (Invoice, Receipt, Acceptance, and Property Transfer) are supported, allowing faster payments and reducing administrative delays.

Key Benefit: Improves cash flow by enabling faster and more accurate invoicing while reducing the risk of over- or under-billing.

Accurate Estimating and Forecasting Tools

Deltek Costpoint equips contractors with advanced forecasting and estimating tools that help in creating more accurate cost estimates for proposals and ongoing projects. The system allows for the simulation of “what-if” scenarios, helping contractors assess the financial impact of changes in project scope or cost variables. This capability is crucial in cost-plus contracts, where unanticipated expenses can easily arise.

Key Benefit: Contractors can create more reliable cost estimates, reducing the risk of cost overruns and improving the likelihood of winning future bids.

Comprehensive Reporting and Analytics

Costpoint provides a wide range of reports and dashboards that give contractors a clear view of their financial performance on cost-plus contracts. Reports such as the Project Status Report, Revenue Summary Report, and Unbilled Analysis offer insights into project profitability, cost recovery, and contract performance. These insights are critical for managing both direct and indirect costs and ensuring that projects remain within budget.

Key Benefit: The ability to monitor and analyze contract performance in real-time helps contractors optimize their cost management strategies and improve profitability.

Scalable to Support Growth and Complexity

Costpoint is designed to grow with your business. Whether you are managing a handful of cost-plus contracts or expanding into hundreds of government contracts, the system can handle increasing complexity without compromising performance. Its multi-company, multi-organization capabilities allow contractors to manage multiple contracts and cost pools seamlessly, regardless of how complex the contract structures become.

Key Benefit: Contractors are equipped with the tools to scale their operations without limitations, ensuring long-term success as they take on more cost-plus work.

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