Open-book contracting
A contract model where the supplier discloses its actual costs and margin, enabling transparent pricing.
Definition
Open-book contracting requires the supplier to share its underlying cost build-up and agreed margin so the buyer can verify price and pursue savings jointly. It suits long-term, trust-based relationships and cost-plus arrangements, but depends on robust audit rights and clear cost definitions.
Example
A construction client and contractor agree open-book pricing so material price drops are passed through directly.
Why this is a business risk
Open-book arrangements only work if the audit rights are exercised and cost definitions are tight. Without those, a supplier can classify costs creatively to inflate the reimbursable base. The model also creates dependency: both parties invest in shared processes, making exit costly if the relationship deteriorates.
How to manage it
- Define precisely which costs are reimbursable and which fall within the agreed margin before signing.
- Negotiate a robust audit right that allows inspection of the supplier's cost records on reasonable notice.
- Exercise the audit right regularly, not only when a dispute arises.
- Build in a gain-share mechanism so the supplier is incentivised to find efficiencies rather than letting costs drift.
- Include clear exit provisions so the arrangement can be unwound without disproportionate cost if performance deteriorates.
Frequently asked questions
Common questions about this term.
Cost-reimbursable and cost-plus-fee contracts in long-term relationships with high complexity or uncertainty, such as major construction projects, outsourced facilities management or complex IT services.
An agreed split of savings generated below the expected cost baseline, incentivising the supplier to find efficiencies by sharing the financial benefit rather than keeping all savings for the buyer.
Cost creep through loose cost definitions or unexercised audit rights, leading to a reimbursable base that grows beyond what the parties originally anticipated.
It can, unless a gain-share or target-cost mechanism is included. Without an efficiency incentive, a cost-plus model can reward inertia rather than performance improvement.
A fixed-price contract transfers cost risk to the supplier; open-book retains cost risk with the buyer but provides transparency and a shared incentive to control costs, making it better suited to high-uncertainty or long-duration work.