Cost-Reimbursement Contract Sample
A cost-reimbursement contract sample is an example of a written agreement between two parties that determines the cost of a product or service.3 min read
A cost-reimbursement contract sample is an example of a written agreement between two parties that determines the cost of a product or service. There are different types of cost-reimbursement contracts: some set a cost for the product or service when the contract is formed; others promise that a cost will be determined in the future.
What Is a Cost-Reimbursement Contract?
Government contracts are usually fixed-price contracts. This means that the cost stated in the contract proposal is the definite price agreed upon for the product or service covered in the contract. A fixed price in this type of contract should include any and all expenses because costs cannot be added later on. A cost-reimbursement contract is an agreement for payment, but without a fixed price.
Many times, a contract covers a long period of time. During that time, the costs for certain materials for a service could change, rendering a fixed-price contract inaccurate and potentially unfair to one party or the other. When two parties agree on a cost-reimbursement contract, they agree that the price is to be determined. This means that the party making the purchase is taking on some risk because they don't have a set price to plan for.
Usually, the final price for the contracted product or service is determined once the product is produced and delivered or the service is complete. Sometimes, cost-reimbursement contracts will agree to determine the price at a set time that isn't necessarily the end of the contract, but probably close to it.
In order to help control costs, the purchasing party can set a budget for the service or product. This allows them to manage their expenses (to a point) and creates a maximum amount allowed for the cost. This is called a total cost estimate and should be agreed upon before any work begins. If the budget needs to be stretched, the contractor will need to gain permission from the purchasing party before continuing work.
Different Types of Cost-Reimbursement Contracts
There are many different types of cost-reimbursement contracts, including:
- Cost contracts.
- Cost-sharing contracts.
- (CPFF) Cost-plus-fixed-fee contracts.
- (CPIF) Cost-plus-incentive-fee contracts.
- (CPIF) Cost-plus-award-fee contracts.
When a cost contract is used, the actual costs of the work are the only costs covered in the agreement. This means that the contractor doesn't receive a fee for their work in particular. Cost contracts are usually seen in nonprofit and research work. There are advantages and disadvantages to cost-reimbursement contracts, so it's important to find the right contract to fit your agreement.
With a cost-sharing contract, the contractor takes on some of the expenses for the work. Once the work is completed, the purchasing party will reimburse the contractor according to a previously agreed-to amount. Cost-sharing contracts also do not gain the contractor a separate fee for their work.
CPFF contracts, or cost-plus-fixed-fee contracts, gain the contractor reimbursement for their costs as well as a fee for their work. The contractor's fee is a set fee that can't change once the contract is signed by both parties and it doesn't depend on the total cost of the project. There are two kinds of CPFF contracts:
- Completion contracts.
- Term contracts.
A complete CPFF contract ties the contractor's fee to the completion of the work agreed upon. So, if the contractor doesn't complete the work, they don't receive their fee. Term CPFF contracts grant the contractor their fee after a certain amount of time has passed and their work is approved, but not necessarily complete.
A cost-plus-incentive-fee contract (CPIF) awards an incentive payment to the contractor for completing the project under budget. If the contractor goes over budget, they may not receive a fee at all or it might be decreased. This is meant to give contractors some motivation to be careful and efficient with their work.
A cost-plus-award-fee contract (CPAF) is very similar to a CPIF contract. The contractor is offered an award based on the quality of their work. Certain aspects of the performance may determine the amount and/or receiving of this fee, which should be spelled out in the contract.
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