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A cost-plus contract is structured in a way that the supplier is reimbursed for all actual costs incurred during the execution of the contract, plus an additional fee. This fee can be a fixed amount or a percentage of the costs, providing the supplier with a profit margin for their work. The rationale behind this type of contract is to share the risk of cost overruns between the buyer and the supplier, ensuring that the supplier is adequately compensated for the work performed while incentivizing efficient project execution.

The contract's design allows for flexibility, particularly in projects where costs may be unpredictable or difficult to assess in advance. This can often be the case in construction projects, research and development work, or any situation where the scope of work may change or is not fully defined at the outset. Consequently, as the actual costs may vary, the buyer’s financial exposure is limited to paying the actual incurred costs, with the understanding that the supplier's fee covers their profit.

In contrast, the other options do not accurately capture this arrangement. Fixed payments regardless of supplier costs do not allow for reimbursement of actual expenses and are characteristic of different contract types, such as fixed-price contracts. Payment based on the total estimated project cost does not consider the actual costs incurred and could lead to