What is cost-plus contract accounting?

Cost-plus contract accounting is the practice of recording, billing, and substantiating costs on cost-reimbursable contracts, where the government reimburses a contractor's allowable incurred costs plus a fee. It governs cost-reimbursable contract types defined at FAR Part 16.3, including Cost-Plus-Fixed-Fee, Cost-Plus-Incentive-Fee, Cost-Plus-Award-Fee, and cost-sharing. Because payment is tied to incurred cost rather than a fixed price, the contractor must operate an accounting system that segregates direct and indirect costs, screens for allowability under FAR Part 31, and produces auditable indirect rates.

What is the difference between cost-plus and fixed-price contracts?

Under a cost-plus, or cost-reimbursable, contract the government reimburses allowable incurred costs plus a fee, so the government carries most of the cost risk and the contractor must substantiate every billed cost. Under a firm-fixed-price contract the price is set in advance and does not move with actual cost, so the contractor bears the overrun risk and the benefit of any underrun. Cost-plus contracts are used when the scope or cost is hard to estimate at award; fixed-price contracts suit well-defined work. Time-and-materials sits between the two, paying fixed labor rates plus materials at cost.

What are the cost-plus contract types under FAR Part 16.3?

FAR subpart 16.3 covers four cost-reimbursable forms. Cost-Plus-Fixed-Fee (CPFF) reimburses allowable costs plus a fixed negotiated fee. Cost-Plus-Incentive-Fee (CPIF) reimburses allowable costs and pays a fee that adjusts on a formula tied to a target cost, between a minimum and maximum. Cost-Plus-Award-Fee (CPAF) reimburses allowable costs and pays a base fee plus an award fee set by the government's evaluation of performance. Cost-sharing reimburses an agreed portion of allowable costs and pays no fee. The fee structure is the main thing that distinguishes them.

How does the fee differ across CPFF, CPIF, and CPAF?

The fee mechanism is what separates the three cost-plus types. CPFF pays a fixed dollar fee that does not vary with actual cost, providing little incentive to control cost. CPIF pays a fee that moves inversely with cost against a negotiated target, within a floor and ceiling, so beating the target earns more fee. CPAF pays a base fee plus an award fee that a fee-determining official sets by judging performance against an award-fee plan over each evaluation period. CPIF rewards measurable cost performance by formula; CPAF rewards broader performance by evaluation.

Why do cost-plus contracts require a DCAA-compliant accounting system?

Because the government reimburses actual allowable costs, it has to be able to verify those costs, and the Defense Contract Audit Agency (DCAA) audits the contractor's system and billings to do so. A compliant system segregates direct and indirect costs, runs an adequate timekeeping system, screens costs for allowability under FAR Part 31, and computes auditable indirect rates. Without that structure, a contractor cannot substantiate cost-reimbursable billings or pass the pre-award accounting system review that often precedes a cost-plus award. The foundations are covered in the DCAA-compliant accounting guide.

What costs are unallowable on a cost-plus contract?

Unallowable costs are costs that, under the FAR Part 31 cost principles, cannot be charged to or billed on a government contract. FAR 31.205 lists selected cost items and identifies categories that are expressly unallowable, including entertainment, certain advertising and public relations, interest on borrowings, fines and penalties, and lobbying. Expressly unallowable costs must be excluded from billings and removed from the bases used to compute indirect rates. A compliant system isolates them in separate accounts so they never reach a reimbursement, which is a routine focus of DCAA review.

What are limitation of cost and limitation of funds clauses?

These clauses cap the government's payment obligation on cost-reimbursable work and require the contractor to give notice as costs approach the cap. The Limitation of Cost clause at FAR 52.232-20 applies to fully funded contracts and obligates the contractor to notify the government when incurred plus anticipated costs reach a set percentage of the estimated cost. The Limitation of Funds clause at FAR 52.232-22 applies to incrementally funded contracts and works against the funds allotted. In both cases the government is not obligated to reimburse costs above the ceiling, and the contractor is not obligated to continue beyond it.

How does Lightbridge ERP help with cost-plus contract accounting?

Lightbridge ERP is an independent, vendor-neutral ERP advisory firm. For cost-reimbursable contractors it designs the indirect rate structure, configures the ERP system to segregate direct and indirect costs by contract, supports allowable-cost screening and timekeeping controls, and prepares the system to produce auditable cost-plus billings. The work is readiness and advisory: Lightbridge prepares organizations to meet these obligations and stays accountable for program outcomes, rather than asserting any certification or vendor partner status. Recommendations are driven by fit, because Lightbridge accepts no vendor kickbacks, reseller quotas, or partner-tier incentives.

SK Written by Sarika Krishnan with Robert LabardeeSenior Program Manager and Founder and CEO

Last updated June 2026.

Cost-Plus and Cost-Reimbursable Contract Accounting

Lightbridge ERP defines cost-plus contract accounting as the discipline of recording, billing, and substantiating allowable costs on cost-reimbursable government contracts, where the government reimburses allowable incurred costs plus a fee. Under FAR Part 16.3, the fee can be fixed, incentive-based, or award-based, and each form places exacting demands on a contractor's accounting system.

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On a cost-plus contract, the government reimburses allowable costs and pays a separately defined fee.

Cost-reimbursable contracts, the family the FAR calls cost-plus, pay a contractor for the allowable costs it incurs in performance, plus a fee. They are appropriate when the work cannot be priced with confidence at award, so the government accepts the cost risk in exchange for substantiation. The contractor commits to a best effort within an estimated cost, and the contract specifies how the fee is set. That fee mechanism, fixed, incentive, or award, is what distinguishes the cost-plus types.

The trade is transparency. Because payment follows incurred cost rather than a fixed price, the contractor has to prove every billed dollar is allowable, allocable, and reasonable. That obligation runs through the entire accounting system, from how a timesheet is recorded to how an indirect rate is computed. The contract types defined at FAR Part 16.3 share that requirement, even as their fee structures differ.

FAR Part 16.3 defines four cost-reimbursable contract types, distinguished by fee.

Each cost-plus form reimburses allowable costs. What changes is how the fee is determined and how much it rewards cost control. These are the four types and what sets each apart.

Cost-Plus-Fixed-Fee (CPFF)

Under a CPFF contract the government reimburses allowable costs and pays a fixed fee negotiated at award. The fee is a set dollar amount that does not vary with actual cost, though it can be adjusted for changes in the contract scope. CPFF carries the least cost-control incentive of the cost-plus family, which is why the government reserves it for work where the scope is hard to define in advance.

Cost-Plus-Incentive-Fee (CPIF)

A CPIF contract reimburses allowable costs and pays a fee that moves on a formula tied to a target cost. When final costs come in below target, the contractor earns a higher fee within a ceiling; when they run over, the fee is reduced toward a floor. The share ratio and the minimum and maximum fee are negotiated, so the accounting system has to track actual cost against the target with precision.

Cost-Plus-Award-Fee (CPAF)

A CPAF contract reimburses allowable costs and pays a base fee plus an award fee determined by the government's periodic evaluation of performance against criteria in an award-fee plan. The award portion is subjective and judged by a fee-determining official, so the contractor must tie cost and performance data to each evaluation period.

Cost-sharing

Under a cost-sharing contract the contractor is reimbursed for an agreed portion of allowable costs and receives no fee. These arrangements appear in research and development work where the contractor expects other benefits from the effort. The accounting system still has to segregate and substantiate the full cost, then apply the negotiated sharing ratio to what is billed.

Cost-plus contracts sit on a risk spectrum with fixed-price and time-and-materials.

Cost-reimbursable contracts place most cost risk on the government and demand the most substantiation. Fixed-price contracts place that risk on the contractor and demand far less cost-level proof. Time-and-materials falls between them. Understanding where a contract sits tells a contractor how much accounting rigor the work will require.

Firm-Fixed-Price (FFP)

A firm-fixed-price contract sets a single price that does not change with the contractor's actual cost. The contractor bears the full risk of cost overruns and keeps the benefit of underruns. FFP demands far less cost substantiation at the contract level, because price, not incurred cost, governs payment.

Fixed-Price-Incentive (FPIF)

A fixed-price-incentive contract sets a target cost, target profit, ceiling price, and a share ratio. Final profit adjusts based on actual cost against the target, up to the ceiling. FPIF blends fixed-price risk with an incentive structure, so cost tracking matters more than under FFP but the ceiling caps government exposure.

Time-and-Materials (T&M)

A time-and-materials contract pays fixed hourly labor rates that already include profit, plus materials at cost. T&M is used when the extent or duration of work cannot be estimated with confidence at award. Labor-hour tracking and a sound timekeeping system are central, since billed labor flows directly from recorded hours at the contract rates.

Many programs blend types across phases or line items, so a single award can carry both cost-reimbursable and fixed-price elements. The system has to account for each correctly. How that cost structure is modeled in an ERP is covered in the GovCon project accounting guide.

Cost-plus contracts require a compliant, DCAA-auditable accounting system.

Because reimbursement follows actual cost, the Defense Contract Audit Agency audits the system that produces those costs. A contractor pursuing cost-reimbursable work often has to pass a pre-award accounting system review before the award. These are the structural requirements that review and ongoing audits look for.

Segregation of direct and indirect costs

A compliant system records direct costs by contract and accumulates indirect costs into logical pools such as fringe, overhead, and general and administrative. Direct costs are charged to the benefiting contract; indirect costs are allocated through rates. The separation has to be visible in the books, not reconstructed at billing time, which is the foundation of any cost-reimbursable billing.

An adequate timekeeping system

Labor is the largest cost element on most cost-plus work, so timekeeping is where auditors focus first. An adequate system captures total time by employee to the correct cost objective daily, with employee certification and supervisory review. Labor distribution then has to reconcile to payroll and to the general ledger without manual adjustment.

Allowable-cost screening under FAR Part 31

Only allowable costs can be reimbursed. The system must screen costs against the cost principles in FAR Part 31 and isolate expressly unallowable costs at FAR 31.205, so they are excluded from billings and from indirect rate computations. Common unallowable categories include entertainment, certain advertising, interest, and lobbying. Misclassification here is a frequent audit finding.

Indirect rate billing and provisional rates

Contractors bill indirect costs during the year using provisional rates, then true those rates up to actual at year-end. The system has to compute pools and bases, apply provisional rates to billings, and support the annual reconciliation. The mechanics of building and defending those rates are detailed in the indirect cost rates guide.

These requirements form a single control environment, not a checklist of separate features. The full picture is set out in the DCAA-compliant accounting guide, and the construction of the indirect rates themselves is detailed in the indirect cost rates guide.

Cost ceilings and unallowable costs bound what a cost-plus contract will reimburse.

A cost-plus contract is not an open checkbook. The Limitation of Cost clause at FAR 52.232-20 and the Limitation of Funds clause at FAR 52.232-22 cap the government's obligation and require the contractor to give notice as incurred costs approach the ceiling or the funds allotted. Above that cap the government is not obligated to pay, and the contractor is not obligated to continue. Tracking incurred plus anticipated cost against those limits in real time is a core function of the accounting system.

Within the ceiling, only allowable costs reach a billing. Costs that are expressly unallowable under FAR 31.205, such as entertainment, certain advertising, interest, fines, and lobbying, must be excluded from billings and stripped out of the bases used to compute indirect rates. The annual reconciliation of provisional billings to actual cost is itself a regulated event, addressed in the incurred cost, CAS, and WAWF guide.

Lightbridge ERP prepares cost-reimbursable contractors to bill and substantiate allowable costs.

Lightbridge ERP is an independent, vendor-neutral ERP advisory firm. For cost-plus work, that means designing the indirect rate structure, configuring the ERP system to segregate direct and indirect costs by contract, supporting allowable-cost screening and timekeeping controls, and preparing the system to produce auditable cost-reimbursable billings and track cost limits. The framing is deliberate: this is readiness and advisory work. Lightbridge prepares organizations to meet these obligations and stays accountable for program outcomes, rather than asserting any certification status of its own.

Vendor neutrality keeps the advice honest. Lightbridge accepts no vendor kickbacks, no reseller quotas, and no partner-tier incentives, so a platform recommendation is driven by fit rather than commission. Whether the right system is a specialized GovCon platform or a broader ERP suite, the selection runs against weighted requirements first. For organizations weighing the path, the government contracting practice is the place to start.

This guide is general information, not legal, accounting, or tax advice. Contract types, cost principles, clause text, and ceiling rules change, so verify current requirements against the official sources, including acquisition.gov for the FAR (Part 16 for contract types, Part 31 for cost principles, and the clauses at 52.232) and the DCAA site for audit guidance. Product names and platforms referenced are trademarks of their respective owners; Lightbridge ERP is independent and is not affiliated with, endorsed by, or a partner-tier reseller of any of them.

Cost-plus contract accounting: frequently asked questions

What is cost-plus contract accounting?: Cost-plus contract accounting is the practice of recording, billing, and substantiating costs on cost-reimbursable contracts, where the government reimburses a contractor's allowable incurred costs plus a fee. It governs cost-reimbursable contract types defined at FAR Part 16.3, including Cost-Plus-Fixed-Fee, Cost-Plus-Incentive-Fee, Cost-Plus-Award-Fee, and cost-sharing. Because payment is tied to incurred cost rather than a fixed price, the contractor must operate an accounting system that segregates direct and indirect costs, screens for allowability under FAR Part 31, and produces auditable indirect rates.
What is the difference between cost-plus and fixed-price contracts?: Under a cost-plus, or cost-reimbursable, contract the government reimburses allowable incurred costs plus a fee, so the government carries most of the cost risk and the contractor must substantiate every billed cost. Under a firm-fixed-price contract the price is set in advance and does not move with actual cost, so the contractor bears the overrun risk and the benefit of any underrun. Cost-plus contracts are used when the scope or cost is hard to estimate at award; fixed-price contracts suit well-defined work. Time-and-materials sits between the two, paying fixed labor rates plus materials at cost.
What are the cost-plus contract types under FAR Part 16.3?: FAR subpart 16.3 covers four cost-reimbursable forms. Cost-Plus-Fixed-Fee (CPFF) reimburses allowable costs plus a fixed negotiated fee. Cost-Plus-Incentive-Fee (CPIF) reimburses allowable costs and pays a fee that adjusts on a formula tied to a target cost, between a minimum and maximum. Cost-Plus-Award-Fee (CPAF) reimburses allowable costs and pays a base fee plus an award fee set by the government's evaluation of performance. Cost-sharing reimburses an agreed portion of allowable costs and pays no fee. The fee structure is the main thing that distinguishes them.
How does the fee differ across CPFF, CPIF, and CPAF?: The fee mechanism is what separates the three cost-plus types. CPFF pays a fixed dollar fee that does not vary with actual cost, providing little incentive to control cost. CPIF pays a fee that moves inversely with cost against a negotiated target, within a floor and ceiling, so beating the target earns more fee. CPAF pays a base fee plus an award fee that a fee-determining official sets by judging performance against an award-fee plan over each evaluation period. CPIF rewards measurable cost performance by formula; CPAF rewards broader performance by evaluation.
Why do cost-plus contracts require a DCAA-compliant accounting system?: Because the government reimburses actual allowable costs, it has to be able to verify those costs, and the Defense Contract Audit Agency (DCAA) audits the contractor's system and billings to do so. A compliant system segregates direct and indirect costs, runs an adequate timekeeping system, screens costs for allowability under FAR Part 31, and computes auditable indirect rates. Without that structure, a contractor cannot substantiate cost-reimbursable billings or pass the pre-award accounting system review that often precedes a cost-plus award. The foundations are covered in the DCAA-compliant accounting guide.
What costs are unallowable on a cost-plus contract?: Unallowable costs are costs that, under the FAR Part 31 cost principles, cannot be charged to or billed on a government contract. FAR 31.205 lists selected cost items and identifies categories that are expressly unallowable, including entertainment, certain advertising and public relations, interest on borrowings, fines and penalties, and lobbying. Expressly unallowable costs must be excluded from billings and removed from the bases used to compute indirect rates. A compliant system isolates them in separate accounts so they never reach a reimbursement, which is a routine focus of DCAA review.
What are limitation of cost and limitation of funds clauses?: These clauses cap the government's payment obligation on cost-reimbursable work and require the contractor to give notice as costs approach the cap. The Limitation of Cost clause at FAR 52.232-20 applies to fully funded contracts and obligates the contractor to notify the government when incurred plus anticipated costs reach a set percentage of the estimated cost. The Limitation of Funds clause at FAR 52.232-22 applies to incrementally funded contracts and works against the funds allotted. In both cases the government is not obligated to reimburse costs above the ceiling, and the contractor is not obligated to continue beyond it.
How does Lightbridge ERP help with cost-plus contract accounting?: Lightbridge ERP is an independent, vendor-neutral ERP advisory firm. For cost-reimbursable contractors it designs the indirect rate structure, configures the ERP system to segregate direct and indirect costs by contract, supports allowable-cost screening and timekeeping controls, and prepares the system to produce auditable cost-plus billings. The work is readiness and advisory: Lightbridge prepares organizations to meet these obligations and stays accountable for program outcomes, rather than asserting any certification or vendor partner status. Recommendations are driven by fit, because Lightbridge accepts no vendor kickbacks, reseller quotas, or partner-tier incentives.

From cost-reimbursable obligation to a system that bills it cleanly.

When cost-plus accounting becomes an ERP design problem, Lightbridge ERP runs a vendor-neutral assessment and prepares the system to substantiate allowable costs.

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