War contracts in which the U.S. government paid the cost plus guaranteed profit are known as:

• A. Cost-plus
• B. Fixed-price
• C. Time-and-materials
• D. Cost-reimbursement

Answer: (A)

Cost-plus contracts reimburse the contractor for all allowable costs and add a guaranteed profit. This arrangement is used when costs are uncertain or rapid production is needed, because it reduces the contractor’s financial risk while still ensuring a profit. In wartime, it allowed producers to ramp up quickly and cover escalating expenses as the government reimbursed actual costs and paid a set profit. It differs from fixed-price contracts, which rely on a predetermined total price; from time-and-materials, which pay based on actual hours worked and materials used; and from other cost-reimbursement forms that may use various fee structures, but the defining feature here is the reimbursement of costs plus guaranteed profit — cost-plus.