<P> Frank B. Gilbreth, one of the founders of industrial engineering, used "cost - plus - a-fixed sum" contracts in his building contracting business . He described this method in an article in Industrial Magazine in 1907, comparing it to fixed price and guaranteed maximum price methods . </P> <P> Cost - plus contracts first came into use by the government in the United States during the World Wars to encourage wartime production by large American companies . According to Martin Kenney, they "allowed what were then small technology firms like Hewlett - Packard and Fairchild Semiconductor to charge the Department of Defense for the price of research and development that none could pay on its own . This enabled the firms to create technology products that eventually created entire new markets and economic sectors". </P> <P> There are four general types of cost - reimbursement contracts, all of which pay every allowable, allocatable, and reasonable cost incurred by the contractor, plus a fee or profit which differs by contract type . </P> <Ul> <Li> Cost plus fixed - fee (CPFF) contracts pay a pre-determined fee that was agreed upon at the time of contract formation . </Li> <Li> Cost - plus - incentive fee (CPIF) contracts have a larger fee awarded for contracts which meet or exceed performance targets, including any cost savings . </Li> <Li> Cost - plus - award fee (CPAF) contracts pay a fee based upon the contractor's work performance . In some contracts, the fee is determined subjectively by an awards fee board whereas in others the fee is based upon objective performance metrics . An aircraft development contract, for example, may pay award fees if the contractor achieves certain speed, range, or payload capacity goals . </Li> <Li> Cost plus percentage of cost pay a fee that rises as the contractor's cost rise . Because this contract type provides no incentive for the contractor to control costs it is rarely utilized . The U.S. Federal Acquisition Regulations specifically prohibit the use of this type for U.S. Federal Government contracting (FAR Part 16.102). </Li> </Ul>

Cost reimbursement contracts are most appropriate for projects that