Generally speaking, it's a recipe for the provider to stick their snout in the trough as far as it will go. There is absolutely no incentive to lower costs or improve efficiencies. It does indeed become a game of brinkmanship between maximizing costs (profits) and cancellation.
I have seen it used in construction to mitigate risk. One example springs to mind. A particularly wealthy but eccentric individual wanted to build a lavish home. He was notorious for changing his mind, adding to the project and so on. The only way the company in question would touch the construction contract was on a "cost plus" basis.
Whenever you do this you basically have to trust the provider to a certain extent and it only really works if they trade on reputation and a hit to their reputation actually matters (often it doesn't).