Prime cost contract
Prime cost contracts are used where an early or immediate start on site is required even though design information is not complete.
This method of procurement is not generally recommended, but it can be useful under particular circumstances where an immediate start on site is necessary (for example for 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 proceeds based on an outline specification, any drawings and an estimate of costs. The Contractor is paid the prime cost (the actual cost of labour, plant and materials) and a fee for overheads and profit. The fee can be agreed by negotiation or by competition, and may be a lump sum (which it may be possible to adjust if the actual cost is different from the estimate), or a percentage of the prime cost (which it may be possible to revise if the client changes the nature of the works).
Other basis for payment are possible, including combinations of lump sum and percentage fees. For example, it might be possible to fix some elements of overheads whilst applying a percentage to other elements and to profit.
This is a high risk form of procurement for the client as they are reliant on the contractor working efficiently and procuring sub-contracts economically. Sub contracts may be procured competitively, but there may be little incentive for the contractor to secure or select economic bids. Some of these difficulties can be mitigated if a partnering relationship has been established between the client and the contractor.
NB Some people consider that a cost reimbursable contract or cost plus contract is one in which the client takes all the risk, whereas a prime cost contract is one in which the cost of the 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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