Reimbursable cost contracts
The main characteristic of the reimbursable cost type of contract is that all direct and indirect expenditures incurred by the contractor are paid on the basis of actual cost without an overlay for profit. Usually, incentives are included in the contract to provide a profit for the contractor if the criteria established in the scope of work are met. Incentives are paid by installments over the life of the contract at specified milestones if, (and only if ) certain agreed project objectives (time, budget, quality and HSE) are met.
It is recommended that an offer is made to the contractor to substantially increase the normal profit amount potentially available with an additional payment, called an ‘Incentive Fee’. The number of milestones selected for payment of the incentive fee during the life of the contract should be limited. Also, the greater part (or if possible all) of the incentive fee should only be available for potential release upon completion of the work. Incentive Fee payments missed at any one milestone should be rolled over to the next milestone and ultimately to the completion date.
The reimbursable cost elements should include only the actual costs incurred. Fixed elements such as “percentages for overheads” should be avoided unless it can be established in advance that such elements will not be used to recover anything other than true costs.
Payment and cost control
Reimbursable cost contracts require detailed and elaborate cost reporting. All the uncertainties for both time and cost are borne by the Company and, unless incentives have been built into the contract, the contractor has little direct motivation to perform efficiently. Sufficient data must therefore be made available to allow regular comparison of performance against plan to highlight deviations, by:
- recording the number of man-hours or cost to date by activity
- measuring the amount of physical progress
- calculating the value of work done
- estimating the amount of work outstanding, based on revised costs/man-hours
the identification of reasons for cost deviations, such as:
- low efficiency/productivity
- bad planning/supervision
- quality of materials or delivery problems
- design changes
- underestimating the scope of the work
The process of controlling such contracts, including the application of the Company’s audit rights, needs to be thoroughly planned and incorporated in the contract documents, and the contractor should be committed to providing data in a timely manner.
- Lump sum contracts
- Unit Rate contracts
- Dayrate contracts for Big Projects
- Time and Materials Contract for Projects | Advantages & Disadvantages
- Bills of quantities contracts