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Reimbursable Cost Contracts (or Reimbursable Contracts)

Reimbursable Cost Contracts or Reimbursable Contracts are quite common in the engineering and construction industry and have achieved a high level of maturity.

This type of Contract is used where the:

  • General nature of the work is known prior to inviting Tenders but not the extent or
  • Scope is ill defined thereby not possible for a Contractor to commit a lump sum price or
  • Client requires early start of work at site pending full definition of requirements,

Under this type, in addition to reimbursing cost on the basis of Work actually done, the Contractor is paid a fixed fee that includes its overheads and profit.

The Client takes control of the management and utilisation of Contract resources due to which minimal risk is assumed by the Contractor and often little incentive to minimise cost and schedule to the Client.

Since it contains a mix of cost and fees, the price administration mechanism is rarely uncomplicated, needing an elaborate Contract Administration and accounting system to track invoices paid, cost/rates analysis, review of supporting documentation for star rate items, etc. thereby making them the most expensive to administer and offer little incentive for Contractors to be cost conscious and efficient. On the other hand, they offer significant flexibility and work start could be achieved almost immediately.

Cost plus fee

The cost and fee reimbursement mechanism in a Contract embraces many variations and forms such as:

  • Cost plus fixed fee; or
  • Cost plus fee based on certain performance; or
  • Cost plus a percentage fee of final costs.

The composition of cost and fee elements could take several forms such as:

Cost

Net Cost: actual cost of salaries & wages, employment burdens (on-costs), materials, transportation, welfare, etc., at invoiced amounts.

Quoted Rates: "all-in" cost rates quoted for staff, hire of plant, site accommodation and messing etc.,

Lump Sums: quotations for the provision of fabricated equipment, usually performed off-site under minimum supervision.

Fee

Lump Sum: Fixed fee paid on completion of the Work/Services provided.

Adjustable Lump Sum: Fixed fee paid on completion or against milestones but subject to adjustment in the event of variations or substantial variations, i.e. can still remain fixed within a band e.g. + or - 15% of variations.

Percentage Fee: A fee calculated as a percentage of the final costs or a fixed fee per man-hour worked representing the Contractors profit and overheads and related to cost man-hour cost rates.

Because of the wide variety of definition available for cost and fee type Contracts, it is of paramount importance that the Contract provides adequate definitions of the these elements, their exact makeup and exclusions, if any. These documents should also precisely describe how costs are to be recorded and what supportive documentation is required to be submitted by Contractor with its invoices since this can often be a sizable cost to be accounted for.

Since there is no definite Contract “end” price under the reimbursable Contract, where relevant and appropriate, Contracts should preferably show a limit of expenditure upto which Client will be liable to pay the Contractor, to prevent the Contract exceeding the Client in-company approved level of commitment and avoid budget overruns. Extensions to the Contract in the form of amendments can be issued to Contractors to approve an increase in commitments subject to appropriate management approvals.

In certain cases it would not be appropriate to show a limit of expenditure under the Contract since doing so may actually promote expenditure to that limit, e.g. design & engineering type Contracts.

The main advantages and disadvantages of this form of Contract are briefly summarised below.

Advantages of reimbursable Contracts:

  • An early start can be made on site.
  • Construction can proceed without the full scope definition being available.
  • Client can exercise a high degree of control in all aspects of the Works/Services.
  • Contracts of this type can be easily terminated e.g. due to poor performance and an alternative Contractor appointed.

Disadvantages of reimbursable Contracts:

  • Final cost of the Works/Services (and hence viability) is unknown at the time of Contract award.
  • Selection of Contractor can often be difficult since the scope for competitive Tendering is reduced.
  • Selection based on the lowest cost estimate is not reliable and therefore evaluation could be subjective.
  • Contractor has little incentive for minimising cost and time overruns.
  • Contractor is unlikely to assign its best people since performance is not dependent upon quality of staff.
  • Client might have to use additional manpower for control and supervision of the Contract to reduce potential exposure to cost and time overruns.
  • Risk in the event of non-performance, cost or time overruns is higher than with more conventional forms of contract and damages are often difficult to prove. Liquidated damages are also difficult to impose since Contractors performance will largely depend on the construction contractor and possibly the Client making it difficult to fix responsibility.
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