Last edited 11 Feb 2016

Cost reimbursable contract

A cost reimbursable contract (sometimes called a cost plus contract) is one in which the contractor is reimbursed the actual costs they incur in carrying out the works, plus an additional fee. Option E of the NEC3 Engineering and Construction Contract (ECC) is an example of a cost reimbursable contract.

A cost reimbursable contract might be used where the nature or scope of the work to be carried out cannot be properly defined at the outset, and the risks associated with the works are high, such as, emergency work (for example urgent alteration or repair work, or if there has been a building failure or a fire requiring immediate reconstruction or replacement of a building so that the client can continue to operate their business). Tendering may proceed based on an outline specification, any drawings and an estimate of costs.

This is a high risk form of contracting for the client as the final cost is not known when the contract is entered into (ie there is no contract sum).

The costs for which the contractor is entitled to be reimbursed must be set out very clearly in the contract. This is a complex procedure that needs to be carefully considered, as whilst some direct costs may be relatively straight forward to determine, whilst other ‘shared’ costs, might not.

Direct costs that are clearly attributable to a single project could include:

Other costs that might be spread across more than one project could include:

  • Head office costs.
  • Staff costs.
  • Manufacturing facilities.
  • Owned plant.

These costs might be calculated on a pro-rata basis and charged, along with profits as a pre-agreed lump sum, or percentage fee.

In order that the contractor can maintain their cash flow, cost reimbursable contracts may also allow them to charge for liabilities, or for costs that will be incurred before the next interim payment.

Costs are calculated based on the contractor’s accounts and other records, which are made available to the client on an ‘open book’ basis. The client may also monitor activities on site to verify that costs are legitimate (for example checking whether plant that is being charged is actually being used) and that costs are not excessive. This can become complex where the contractor is thought to be operating inefficiently or incompetently.

The contractor can be incentivised to operate efficiently by the introduction of a target cost. Here, a target cost is agreed at the beginning of the project. At the end of the project the actual cost is compared to the target cost (taking into account any changes that have been agreed). If the actual cost is lower than the target cost, the savings are shared between the parties to the contract on some pre-agreed basis (often a percentage). If the actual cost is higher than the target cost, the additional costs may also be shared.

NB JCT suggest that a prime cost contract, cost plus and cost reimbursable contract are in fact the same thing. Others consider that a prime cost contract is one in which the cost of works packages (the prime cost) are reimbursed, but the main contractor takes a risk on staffing, overhead costs and profit which might be tendered on a fixed price.

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