Question

1. Governments often contract with suppliers for unique items (e.g. military equipment) on a cost-plus basis. Cost plus pricing is one where the contractor is reimbursed for the cost of completing the contract plus a mark-up on computed cost.

In a cost-plus contracting environment, what is the contractor’s motivation when deciding the rate to be used to allocate manufacturing overhead to the job? In other words, would the contractor prefer a higher or lower rate? Why? 4 points

Answer 1

Contractor’s motivation, while deciding the rate to be used to allocate manufacturing overhead to the job, under cost plus contract, are-

1. Cost plus contract are less expensive than a fixed-price contract as no need to charge a higher price to cover the risk of a higher manufacturing overhead cost than expected. So it is a motivation to contractor.

2. Quality of indirect material and other utility expenses inspire the contractor to perform in better ways as he knows that whole cost Will be covered.

3. Some experiments regarding expenses including overheads can be made as such contract are conducted by inexperienced contractors.

4. No chances of risk in flexible projects as in such types of contracts contractor can concentrate over better performance by allocating unpredictable overheads.

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