Cost reimbursement

From CEOpedia | Management online

A cost reimbursement (CR) is a type of contract where the seller does not receive any fee and is only reimbursed for an agreed part of his eligible costs[1].

Cost reimbursement contracts provide the payment of eligible costs incurred to the extent provided for in the agreement. In the case of cost reimbursement contracts, most of the financial risk of the plan rests with the buyer, who is required to pay more than the budget if labour, material or other costs incurred are higher than expected at the time of signing the agreement. According to the Federal Acquisition Regulation this type of contract should be used when the uncertainties surrounding the performance of the contract do not permit an estimate of costs to be made with sufficient accuracy to apply any type of fixed price contract[2].

That contract should not be used by state and local government contracting agencies unless they are they are prepared to employ significantly more employers during the negotiation and administration of contracts to a greater extent than is normally required for the award and management of fixed-price contracts[3].

Types of the cost reimbursement contract

There is a few specific types of the cost reimbursement contract. The difference between them is whether the contractor wants to recover only costs or if there is some allowance for profit. Some of them may be also nonprofits contracts.

The contracts may be[4]:

  • Cost contracts
  • Cost-sharing contracts
  • Cost plus fixed fee contracts
  • Cost plus a percentage of cost contracts

Advantages of using the cost reimbursement contract

There is a lot of advantages of using the cost reimbursement contract and the most important are as following[5]:

  1. This is the most convenient contract of any others
  2. The contractor may be selected to enter into a contract and start work before the end of the programme and without any estimates or quantities needed for the preparation
  3. Contractor management methods in theory can in any case be used to bring benefits to the client
  4. The client may be sure that the contractor will not achieve an excessive profit

Examples of Cost reimbursement

  • One example of a cost reimbursement contract is a research and development contract. This type of contract is used when a company hires a research team to develop a new product or service. The company will provide the research team with a budget and pay for any of the costs associated with the project. The research team will then be reimbursed for any eligible costs that are incurred during the project.
  • Another example of a cost reimbursement contract is a construction contract. In this type of contract, the contractor is responsible for providing materials, labor, and any other related costs associated with the construction of a building or structure. The contractor will then be reimbursed for any eligible costs that are incurred.
  • A third example of a cost reimbursement contract is a consulting contract. In this type of contract, the consultant is hired to provide services to a company. The consultant will provide a list of services and the company will pay for any of the costs associated with those services. The consultant will then be reimbursed for any eligible costs that are incurred.

Limitations of Cost reimbursement

Cost reimbursement contracts have some limitations that should be taken into consideration before entering into an agreement. These include:

  • The cost reimbursement contract requires the seller to bear the risk of any cost overruns, as they are not guaranteed to be reimbursed for any costs that exceed the agreed upon amount.
  • The seller is also required to provide detailed documentation of all costs incurred in order to receive reimbursement, which can be a lengthy and expensive process.
  • The buyer is not guaranteed any specific product or service quality as a result of the cost reimbursement contract, as the seller is not contractually obligated to meet any performance standards.
  • Additionally, the buyer does not have any control over the seller’s decision making process, as the seller is responsible for determining how to allocate resources in order to minimize costs.

Other approaches related to Cost reimbursement

One approach related to cost reimbursement is the cost-plus-fixed-fee contract. In this type of contract, the seller is reimbursed for their costs plus an agreed upon fixed fee. Additionally, other approaches related to cost reimbursement are:

  • Cost-plus-incentive fee (CPIF) - This is a type of contract where the seller is paid a fixed fee plus an incentive fee that is determined by the performance of the seller regarding predetermined criteria.
  • Cost-plus-award-fee (CPAF) - This is a type of contract where the seller is paid a fee based on their performance relative to predetermined criteria, and an award is given to the seller if they meet the performance criteria.
  • Time-and-materials (T&M) - This is a type of contract where the seller is reimbursed for the materials used and their labor costs, with the fee being calculated based on the hourly rate of the labor.
  • Fixed-price (FP) - This is a type of contract where the seller is paid a fixed fee for a specific activity regardless of the actual costs involved.

In summary, a cost reimbursement contract is a type of contract where the seller is only reimbursed for an agreed part of their eligible costs. Other approaches related to cost reimbursement are cost-plus-fixed-fee, cost-plus-incentive-fee, cost-plus-award-fee, time-and-materials and fixed-price contracts.

Footnotes

  1. ↑ Garret A.G (2008)
  2. ↑ Sullivan M (2010)
  3. ↑ Curry S.W (2016)
  4. ↑ Manuel M.K (2011)
  5. ↑ Kirkham R (2014)


Cost reimbursement — recommended articles
Firm fixed price contract — Forms of contract — Unit price contract — Provisional sum — Lump-sum contract — Bid documents — Task order — Design bid build — Commencement date

References

Author: Veniamin Terokhin

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