Cost reimbursement contract (cost plus Contracts)
Cost reimbursement contract is 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 upon based on these documents.
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. It is due to the acceptance of the cost. Moreover, the contractor does not wish to propose cheap alternative materials to maximise his profit.
You can also judge the final cost at some other recently settled date in the contracting time frame and before starting the contract work. It will also permit the organisations to set a spending plan for the project. In this way, the organisation can also create the highest reimbursement amount.
The main contractor has no option to surpass this highest without getting official’s authorisation. However, he can pause work if that highest is gone after. So read on, how cost-reimbursement contracts can fall into a few distinct categories:
What are the main types of Cost reimbursement contracts?
- Cost Contracts–In a cost contract, the contractor will achieve the real price of the contract. The contractor gets no extra charge. These contracts are mostly useful for research and nonprofit work.
- Cost-Sharing Contracts__ The Contractor accepts some portion of the agreement costs. The organisation will repay the temporary worker for an endless supply of those costs. Similarly, the contractor gets no extra charge. He should enter into a cost-sharing agreement, mainly if the work profited the organisation in manners adequate to counterbalance the mutual consumptions.
- Cost + Fixed Percentage Contract – Client will pay a profit percentage apart from the actual price. This fixed percentage will agree at the beginning of the project.
- Cost + Fixed Fee Contract – Client is agreeing to pay a fixed fee as a profit + actual costs occurred. In here also both the parties will agree on a fixed price before commencing the project.
- 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 entitle to a fixed profit.
Most importantly, the contractor should present proper evidence for the cost incurred for receiving payments. The client may evaluate the cost thoroughly because the contractor can increase the value intentionally to maximise the profit, especially in cost plus- fixed percentage contract.
Above are the types of cost-plus contracts. Now let me explain the advantages and disadvantages of cost-reimbursable (Cost reimbursement) contracts.
What are the Pros & Cons of Cost reimbursement contracts (cost-plus contracts)?
Advantages of cost-reimbursable contracts/ 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 contracts/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)
In the below quick video, we have explained all the factors regarding cost-reimbursable contracts/cost-plus contracts.
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