Last edited 11 Feb 2016

Defined cost

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.

Their actual costs are calculated based on their accounts and records, rather than a pre-determined rate or price. However, not all costs can be accurately determined on a project-specific basis, some costs have only been incurred due to the contractor’s inefficiency, and not all costs are recoverable under the contract.

Options (C, D, E and F) of the NEC (New Engineering Contract), EEC contract (Engineering and Construction Contract), describe the costs that can be recovered by the contractor as the ‘defined cost’, whereas the costs that cannot be recovered are described as the ‘disallowed cost’.

Very broadly, the defined cost includes payments due to subcontractors and the cost of components for other works (such as plant, equipment, people and so on), minus the disallowed cost.

The contract stipulates that only amounts incurred to provide the works are recoverable as cost components. If an amount can be classified as one component, such as ‘equipment’, then it cannot also fall within another, such as ‘people’.

There are seven cost component criteria:

  • People: Those directly employed or paid by the contractor to carry out the works.
  • Equipment: Items provided by the contractor and used to provide the works.
  • Plant and materials: Items intended to be used and included in the works.
  • Charges: Cancellation charges arising from a compensation event, payment to public authorities, specialist services, and so on.
  • Manufacture and design: Only apply if they are outside the working areas and wholly or partly designed specifically for the works.
  • Design: Costs for the works and equipment only.
  • Insurance: Does not actually facilitate cost recovery for the contractor. Costs that would otherwise be recoverable that have been paid by the insurer to the contractor are set off against the recoverable cost.

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