Cost Reimbursement Contract: A Quick Guide

Cost Reimbursement Contract: A Quick Guide

Contracts vary from fixed-price contracts to others with more flexibility. A cost-reimbursement contract is an agreement between parties in a construction project that guarantees the owner reimburses the contractor for costs incurred while they work on the project. Cost reimbursement is a way for a contractor to secure labor and materials necessary for the execution of the project without having to fit those resources within a tightly defined and predetermined price. The contractor is not paid solely for the costs but is also guaranteed an additional payment. The contract will still include an estimate for the total cost of the project.
Cost reimbursement contracts are four distinct categories: Cost Plus Fixed Fee (CPFF) and Cost Plus Incentive Fee (CPIF). CPFF reimburses the contractor for all incurred costs, plus a fixed fee, and the customer bears the risk. CPIFs are used in high-risk projects where it might be difficult to get bidders to compete. There are two types of CPFF contracts: completion, where a goal or product the contractor must deliver to receive their fee is identified, and term, where the contract specifies a time period and level of effort the contractor must achieve.
Contracts are legally binding documents between two parties outlining the terms and conditions of the working relationship between them, usually awarded after a construction bidding process. The CPAF gives the contractor an award fee when they meet certain performance metrics outlined in the contract. The CPPC awards the contractor all costs for the project and a percentage of those costs, but this is not a popular choice with project owners unless they trust the contractor. These contracts have greater regulations applied to them to avoid such risks. What is typically included in a Cost Reimbursement Contract?