Cost Reimbursement Contracts in construction and engineering
Cost Reimbursement Contracts in construction and engineering are a type of contract where the contractor is reimbursed for all reasonable and allowable costs incurred while performing the work, plus a fee to cover overhead and profit. The contractor is not responsible for completing the work for a fixed price, as in a lump sum contract. Instead, the contractor’s fee is based on the actual costs incurred, subject to a pre-agreed ceiling or maximum limit.
Cost Reimbursement Contracts are typically used for projects where the scope of work is unclear, or where cost predictability is difficult. These contracts transfer the risk of cost overruns to the owner and provide the contractor with a financial incentive to control costs.
Examples of Cost Reimbursement Contracts include:
- Cost Plus Award Fee Contract: In this type of contract, the contractor is reimbursed for all costs, plus an award fee based on their performance.
- Cost Plus Incentive Fee Contract: In this type of contract, the contractor is reimbursed for all costs, plus a fee that is tied to specific performance objectives.
- Time and Material Contracts: In this type of contract, the contractor is reimbursed for all costs based on actual time worked and materials used.
Cost Reimbursement Contracts can provide greater flexibility for the contractor, but can also lead to higher costs for the owner if not managed carefully. It’s important for both the contractor and the owner to understand their respective obligations and responsibilities under a cost reimbursement contract.