What does a "cost-plus" contract entail?

A "cost-plus" contract is a type of construction agreement where the contractor is compensated for all project-related costs incurred, plus an additional fee that accounts for their profit. This fee can be a percentage of the costs or a fixed amount agreed upon before the project begins. This structure is beneficial for projects where costs are unpredictable or when the scope of work can change, allowing for flexibility in budgeting.

This type of contract ensures that the contractor is not solely limited to a pre-determined sum, which can help to mitigate the financial risks associated with unforeseen expenses that may arise during the construction process. Additionally, it can encourage the contractor to maintain quality since profit is tied to the total costs incurred, which can lead to better resource management and oversight.

In contrast, the other options do not accurately reflect the nature of a cost-plus contract. Fixed-price contracts do not allow for adjustments based on actual costs incurred; contracts based only on profit margins disregard direct expenses; and being paid only for labor costs ignores materials and other overheads involved in the project.