A cost-reimbursement contract pays the contractor's actual incurred costs that meet the FAR Part 31 cost principles — allowable, allocable, and reasonable — plus a fee component agreed at award. The contract has an estimated cost and a separately stated fee, with a Limitation of Funds or Limitation of Cost clause requiring the contractor to notify the government before exceeding ceiling thresholds. Cost-reimbursement is appropriate under FAR 16.3 when the scope is too uncertain to support a firm fixed price, performance risk is high, or research and development requires flexibility the FFP structure cannot accommodate.
Three primary fee structures sit under the cost-reimbursement umbrella. Cost-Plus-Fixed-Fee (CPFF) sets a fee dollar amount that does not vary with cost performance. Cost-Plus-Incentive-Fee (CPIF) adjusts fee based on a sharing formula tied to cost outcomes. Cost-Plus-Award-Fee (CPAF) sets a base fee plus an award-fee pool earned subjectively against an Award Fee Plan. Cost-reimbursement work requires a DCAA-acceptable accounting system, segregation of direct and indirect costs, monthly invoicing aligned to incurred costs, and annual incurred-cost submissions reconciling provisional billing rates to actuals.
For small contractors, cost-reimbursement work is operationally heavier than FFP but shifts cost risk to the government. The accounting system investment is non-trivial — most firms graduate into cost-reimbursement work only after building DCAA-compliant infrastructure. Once established, the structure supports R&D, advisory, and complex services where FFP would force the contractor to load substantial risk premiums into bid pricing.