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Simple English definitions for legal terms
cost-plus contract
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A quick definition of cost-plus contract:
A cost-plus contract is an agreement between two or more parties that creates obligations that are enforceable by law. It is a type of contract where the buyer agrees to pay the seller for the cost of the goods or services provided, plus an additional amount for profit. This type of contract is often used in construction projects or when the cost of the goods or services is uncertain. The seller is incentivized to keep costs low, as their profit is tied to the cost of the project.
A more thorough explanation:
A cost-plus contract is a type of contract between two or more parties that creates enforceable obligations. In this type of contract, the buyer agrees to pay the seller for the cost of the goods or services provided, plus an additional amount for profit or overhead expenses.
For example, a construction company may enter into a cost-plus contract with a client to build a new office building. The contract may specify that the client will pay the construction company for the cost of materials, labor, and other expenses, plus an additional 10% for profit.
Another example is a software development company entering into a cost-plus contract with a client to create a new software program. The contract may specify that the client will pay the software development company for the cost of the developers' time, equipment, and other expenses, plus an additional 20% for overhead expenses.
These examples illustrate how a cost-plus contract works by allowing the seller to recover their costs and make a profit or cover their overhead expenses. The buyer benefits by knowing exactly what they will pay for the goods or services provided, and the seller benefits by being able to recover their costs and make a profit.