Cost reimbursement contract and re-measurable contract are both similar type of contracts used in the construction industry. In these two methods, payments will be made based on the actual work done (by the client). Compare to other procurement methods, Client’s risk is high in these two methods (and the contractor’s risk is minimal).
Re measurable contracts / Unit price contracts
In re-measurable contracts, works will be carried out based on the pre-agreed unit rates. All the Payments will be paid based on the actual work done after measuring the work done. So the final value of the project will be derived based on the unit prices and exact quantities. The contractor will provide their rates based on the BOQ supplied by the client.
Mostly re measurable contracts are used to appoint small subcontracting works such as painting, plastering etc. Also, this contract type widely uses for tasks, which quantities are not able to determine in the initial stage (such as demolition). As we mentioned in the lump sum contracts, procurement method to execute work is mainly decided based on the client’s requirements such as budget, quality and time frame. Re measurable contracts is highly recommended where,
- The client does not have a tight budget.
- The client wants to improve and change the design and the finishes at a later stage.
- And the client wants to start works immediately based on competitive unit rates.
So based on the above requirement project management team (consultants) prepare the initial design and approximate BOQ to start works immediately. Mostly traditional closed envelope tendering method is used in this procurement method to choose a suitable contractor. The suitable contractor will select after comparing each contractor’s unit rates.
Advantages of re measurable contract (unit price contracts)
- works can start after finalising the initial design and BOQ
- Can reduce the design cost.
- High possibility to do value engineering
- Prices (unit rates) will be competitive
- Contractor’s risk is comparatively low
Disadvantages of re measurable contract (unit price contracts)
- Cant predict the final value of the project
- Delays in contractor’s payments (assessment of the measurements takes time)
- Client’s risk is comparatively high
Cost reimbursement contract (cost plus Contracts)
Also known as the Cost-plus contracts. Unlike the fixed price contracts, quantities are not prefixed in the cost-reimbursable contracts. The contractor is valuing the project based on the Drawings & specs given by the consultants or client. The final value of the project will be agreed based on these documents. And the client will pay the contractor’s actual cost plus an incentive or profit as agreed. This procurement root mainly uses for the projects, which clients want to finish with the expected quality. Because the cost is already accepted, and the contractor does not wish to propose cheap alternative materials to maximise his profit.
Cost reimbursable contracts can divide into three categories.
- Cost + Fixed Percentage Contract – Client will pay a profit percentage apart from the actual price.
- Cost + Fixed Fee Contract – Client is agreeing to pay a fixed fee as a profit + actual costs occurred
- Cost + Fixed Fee with Guaranteed Maximum Price Contract – Contractor agrees that the project value will not exceed and after executing the project within the agreed amount contractor will be entitled to a fixed profit.
Advantages of cost-reimbursable contracts
- Contractor’s risk is minimal
- An easy material approval process
- The final quality is as expected by the client
- Fixed final cost
- Works can start immediately
Disadvantages of cost reimbursed contracts
- The contractor should prove their expenditures
- Justifying of indirect cost can be hard
- Fixed profit to the contractor( can not improve profit margin in execution stage)
- The contractor can take time to make a profit (By extending they can increase the preliminary costs)