In a cost reimbursable contract, the organization agrees to pay the contractor for the cost of performing the service or providing the goods. Cost reimbursable contracts are also known as cost plus contracts. Cost reimbursable contracts are most often used when the scope of work or the costs for performing the work are not well known. The project uses a cost reimbursable contract to pay the contractor for allowable expenses related to performing the work. Since the cost of the project is reimbursable, the contractor has much less risk associated with cost increases. When the costs of the work are not well known, a cost reimbursable contract reduces the amount of money the bidders place in the bid to account for the risk associated with potential increases in costs.
The contractor is also less motivated to find ways to reduce the cost of the project unless there are incentives for supporting the accomplishment of project goals. Cost reimbursable contracts also require good documentation of the costs that occurred on the project to assure that the contractor gets paid for all the work performed and to assure that the organization is not paying for something that was not completed.
Cost Reimbursable Contract to Drill Wells
A project to build a new plant in an area that did not have sufficient water included the drilling of water wells to produce several thousand gallons of water a day for the new plant. Although geological surveys indicated there was sufficient water to meet the plant’s requirements, the number of wells needed was unknown. The project developed a cost reimbursable contract that paid the well drilling contractor for allowable costs associated with drilling the wells.
Allowable costs included the costs associated with locating all the equipment and materials to the project site, the labor and materials used to drill the wells, daily costs for the use of the drilling rigs, routine maintenance of the drilling equipment, the room and board for the workers, and administrative fees and profit. The contractor collected the costs associated with drilling the wells each month and submitted a bill to the project accountant.
The contractor is paid an additional amount above the costs. There are several ways to compensate the contractor.
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