FLYING HIGH
Commercial airplanes
Aircraft and weapon systems (A&ws)
A cost-plus contract also termed a Cost Reimbursement Contract is a contract where a contractor is paid for all of its allowed expenses to a set limit plus additional payment to allow for a profit
Cost-reimbursement contracts contrast with fixed-price contract in which the contractor is paid a negotiated amount regardless of incurred expenses.
Cost-plus contracts first came into use in the United States during the World Wars to encourage wartime production by large American companies.
Types
Awards/incentive payment
Awards/incentive payments are included in contract revenue using a probability-weighted approach when such payments can be reasonably estimated. Such amounts can be reasonably estimated when the contractor has experience with similar types of contract and that experience has predictive value (that is, experience is relevant to the contract because the entity does not expect significant changes in circumstances).
Current US GAAP
Awards/incentive payments should be included in contract revenue when the specified performance standards are probable of being met or exceeded and the amount can be reliably measured
Current IFRS
Awards/incentive payments should be included in contract revenue
when the specified performance standards are probable of being met or exceeded and the amount can be nreliably measured
a. Contract Accounting (in Part)
‘‘Contracts may contain provisions to earn incentive and award fees if targets are achieved. Incentive and award fees that can be reasonably estimated are recorded over the performance period of the contract. Incentive and award fees that cannot be reasonably estimated are recorded when awarded.’’
Comment on the difficulty in determining which incentive and award fees can be reasonably estimated.