Cost-Plus-Percentage-of-Cost (CPPC)
A Cost-Plus-Percentage-of-Cost (CPPC) contract is a type of cost-reimbursement arrangement in which the contractor is reimbursed for allowable incurred costs and paid profit calculated as a percentage of those costs. Because profit increases as costs increase, CPPC contracts create a built-in disincentive for cost control — and are prohibited under federal acquisition rules.
What Is a Cost-Plus-Percentage-of-Cost (CPPC) Contract?
A Cost-Plus-Percentage-of-Cost (CPPC) contract is a type of cost-reimbursement arrangement in which the contractor is reimbursed for allowable incurred costs and paid profit calculated as a percentage of those costs.
In simple terms: the more the contractor spends, the more profit the contractor earns.
Because profit increases as costs increase, CPPC contracts create a built-in disincentive for cost control — and are prohibited under federal procurement rules.
The prohibition appears in Federal Acquisition Regulation 16.102(c), which states that cost-plus-percentage-of-cost contracting shall not be used in federal acquisitions.
Key Characteristics of CPPC
To illustrate: on a contract with $1,000,000 in allowable costs and a 10% profit percentage, the contractor earns $100,000 in profit. If costs increase to $1,200,000, the contractor earns $120,000 — higher cost equals higher profit. This misaligned incentive structure is exactly why CPPC is prohibited in federal contracting.
Reimbursement of Allowable Costs
Subject to cost allowability rules under FAR Part 31, the contractor is reimbursed for all allowable incurred costs.
Percentage-Based Profit
Profit is calculated as a fixed percentage of actual cost incurred — meaning profit grows directly with spending.
No Cost Ceiling Incentive
Unlike other cost-reimbursement types, there is no mechanism reducing the fee when costs increase. Higher spending directly increases contractor profit.
Regulatory Framework
CPPC contracts are prohibited in federal procurement under:
Federal Acquisition Regulation 16.102(c), which explicitly prohibits cost-plus-percentage-of-cost contracting
FAR Part 31 Cost Principles, which require costs to be allowable, allocable, and reasonable
CPPC contracts violate fundamental government procurement principles because contractor profit increases with higher spending, there is no financial incentive to control costs, the government bears all cost risk, and overspending directly benefits the contractor.
Why Understanding CPPC Matters for Contractors
Even though CPPC is prohibited in federal contracting, understanding it is important because it clarifies why incentive alignment matters in contract design, explains the evolution of modern contract structures, and highlights the government's emphasis on cost control. CPPC differs from approved cost-plus alternatives:
Cost-Plus-Fixed-Fee (CPFF): fee is fixed at award and does not grow with costs
Cost-Plus-Incentive-Fee (CPIF): fee adjusts based on performance and sharing ratios, incentivizing cost control
In federal contracting, any contract structure that resembles CPPC will likely be rejected. Common approved alternatives include Cost-Plus-Fixed-Fee (CPFF), Cost-Plus-Incentive-Fee (CPIF), and Firm-Fixed-Price (FFP).
Some state or commercial arrangements may resemble CPPC, so contractors should be aware of the distinction when working across different procurement environments.
Common Misconceptions About CPPC
CPPC is just another cost-reimbursement contract type.
It is specifically prohibited under federal acquisition rules due to misaligned cost incentives.
All cost-plus contracts are the same.
Only CPPC ties profit directly to actual cost growth. CPFF and CPIF use fixed or performance-based fee structures.
CPPC guarantees unlimited contractor profit.
While profit grows with cost, cost allowability rules still apply and oversight mechanisms limit what can be claimed.
Frequently Asked Questions
Are CPPC contracts ever allowed in federal procurement?
No. FAR 16.102(c) explicitly prohibits them.
Why were CPPC contracts used historically?
They were sometimes used during emergencies or early government programs before procurement reforms strengthened cost-control rules.
What should contractors propose instead of CPPC?
Common alternatives include Cost-Plus-Fixed-Fee (CPFF), Cost-Plus-Incentive-Fee (CPIF), and Firm-Fixed-Price (FFP).
Related Government Contracting Topics
Cost-Reimbursement Contracts: Contract types where the government reimburses allowable incurred costs, including CPFF and CPIF.
Cost Accounting Standards (CAS): Standards governing consistency in cost accounting practices for government contractors.
Cost Principles (FAR Part 31): Federal rules defining allowable, allocable, and reasonable costs in government contracts.
Incentive Contract Structures: Contract types designed to align contractor profit with cost and performance goals.
Profit Policy in Federal Contracting: Government guidelines governing reasonable profit levels in negotiated procurements.
Cost-Plus-Percentage-of-Cost contracts serve as a foundational example of what federal procurement rules seek to avoid: misaligned incentives that reward higher spending. Understanding CPPC helps contractors appreciate why modern contract types emphasize cost discipline, performance alignment, and shared risk in government contracting.