What is a cost-plus-fixed-fee contract?

A cost-plus-fixed-fee contract is defined as a type of cost-reimbursement contract where the contractor is reimbursed for allowable costs incurred during the performance of the work and also receives an additional fixed fee as compensation for their efforts. In this type of contract, the contractor's payment is directly related to the costs of the project, which can include expenses for labor, materials, and overhead. The fixed fee is predetermined and does not change regardless of how the actual costs fluctuate, providing the contractor with a guaranteed profit margin.

This structure is particularly advantageous in situations where project costs are uncertain, as it allows for flexibility in managing those costs while still ensuring that the contractor has a defined profit. The contractor is incentivized to control costs, as reducing expenses increases their overall profit despite the fixed fee. However, since the payment structure does not directly tie the contractor's profit to the project's successful outcome in terms of efficiency or cost savings, it is vital to have robust oversight and monitoring of costs.

In contrast, the other options describe different contract types or elements that do not accurately reflect the nature of a cost-plus-fixed-fee contract, such as performance bonuses or guaranteed minimum profits, which do not apply under this specific contract framework.