A cost reimbursable contract, also known as a cost-plus contract, allows an employee or contractor to protect their profits and assets with minimum hassle. The purpose of the contract is to allow a contractor to either stop working after available funds have been spent, or if necessary to receive additional funding to continue the project.
How It Works
An ordinary fixed-price contract provides a contractor a set price to do a specific task. However, the contractor may incur extra overhead costs such as a rise in the cost of materials, or the need to hire additional workers or obtain special permits. A fixed-price contract would not allow the contractor to obtain additional funds needed from the developer, or stop work on the project. With a cost reimbursable contract, the contractor may choose to either terminate the project or to receive additional funding before proceeding.
A cost reimbursable contract may be used by almost any type of contractor or contract employee and is not limited to construction work. Depending on the job, the concerns of the employer and employee and local laws, a different type of cost reimbursable contract may be used for each individual.
Different types of cost reimbursement contracts are available to suit different needs. The simple cost contract allows for reimbursement of any allowable costs. The cost-plus-fixed-fee contract pays a fixed fee to the contractor in addition to certain costs. Cost-sharing allows a fixed fee plus half of any allowable costs. A cost-plus-incentive contract pays any allowable costs and the difference between the original and final costs. The cost-plus-award contract reimburses for allowable costs, and pays a fixed fee and a bonus based on the overall performance of the contractor.
In most cases a cost reimbursement contract will hold legal limitations to prevent it being abused or misappropriated by either party involved. Limitations often include allowable fees, meaning only fees that would logically incur from the contract can be applied to the reimbursement. The contractor generally must be able to account for the costs and must consent to monitoring during construction.