Cost Plus Percentage of Cost (CPPC)
A Cost Plus Percentage of Cost, or CPPC, contract is one of the simplest cost-type agreements to describe — but also the riskiest for the buyer. The buyer pays back all the seller's actual costs (the real money spent doing the work), and then adds a fee that is a fixed PERCENTAGE of those costs. So the more the seller spends, the bigger the fee they earn.
Calculating it is straightforward: take the total costs, multiply by the agreed percentage to get the fee, then add that fee to the costs to get the final price. For example, a 10 percent fee on $50,000 of costs is $5,000, making the price $55,000.
Now read the incentive hidden inside this. Because the fee grows as costs grow, the seller actually benefits from spending MORE, not less. That's a problem — it rewards inefficiency. For this reason, CPPC is generally discouraged and is even illegal for many government contracts. On the exam and in practice, project managers should recognize CPPC as the contract type that puts the most cost risk on the buyer and gives the seller the wrong motivation.
Think of it like a repair shop that charges you a fee equal to 10 percent of whatever it spends on your car. The more parts and hours they rack up, the bigger their paycheck — so they have every reason to make the job as expensive as possible. That built-in temptation is why this contract type is often banned.
Imagine a seller is hired under a CPPC contract with a 10 percent fee. They spend $50,000 doing the work. The fee is 10% of $50,000 = $5,000, so the final price is $50,000 + $5,000 = $55,000. But notice what happens if the seller lets costs balloon to $80,000: the fee becomes 10% of $80,000 = $8,000, and the price jumps to $88,000. The seller earned $3,000 MORE simply by spending more — showing exactly why buyers dislike this arrangement.
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