Which contract type recognizes revenue primarily based on the costs incurred plus a fee?

Which contract type recognizes revenue primarily based on the costs incurred plus a fee?

• A. Time-and-material contracts
• B. Cost-plus contracts
• C. Fixed-price contracts
• D. Unit-price contracts

Answer: (B)

Cost-plus contracts recognize revenue as costs are incurred plus an agreed-upon fee. In this setup, the contractor is reimbursed for allowable costs (labor, materials, overhead) and also earns a fee when those costs are incurred, so the revenue flow aligns with the costs incurred. This differs from time-and-material contracts, where revenue is based on actual labor hours and material usage at agreed rates; fixed-price and unit-price contracts tie revenue more to completed work or units delivered rather than to costs incurred. So the description of recognizing revenue based on costs incurred plus a fee matches the cost-plus contract structure.

Cost-plus contracts recognize revenue as costs are incurred plus an agreed-upon fee. In this setup, the contractor is reimbursed for allowable costs (labor, materials, overhead) and also earns a fee when those costs are incurred, so the revenue flow aligns with the costs incurred. This differs from time-and-material contracts, where revenue is based on actual labor hours and material usage at agreed rates; fixed-price and unit-price contracts tie revenue more to completed work or units delivered rather than to costs incurred. So the description of recognizing revenue based on costs incurred plus a fee matches the cost-plus contract structure.