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(Cost reimbursement contract). 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(Cost reimbursement) 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(Cost reimbursement) 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)