Cost Reimbursable Contracts
Also known as Cost Plus (CP) contracts. In Cost Reimbursable Contracts, the Seller is reimbursed for completed work plus a fee representing his profit
- The Seller produces the original invoices to ascertain actual costs incurred
- Scope Creep is an inherent drawback of this contract, especially when the requirements are unclear
Cost Reimbursable Contract Types
Cost Plus Fixed Fee (CPFF)
The Seller is paid for all incurred Costs plus a Fixed Fee as his profit. The entire Risk is Buyer’s
- Fixed fee (% of initial estimated projected cost, or fixed amount) does not change after the contract is signed unless the Project Scope changes
- CPFF contract keeps the Seller safe from Risks
Example: The Seller shall be paid total cost incurred plus 12% of the initial project cost as fee
Cost Plus Fixed Fee (CPFF) Contract Example
In a procurement contract, the buyer and seller agree to a contract cost of Rs 100 million, payment of all expenses to the seller against verifiable invoices and 15% of contract cost as the seller’s fee.
What is a turn-key contract?
A turn-key contract is a contract in which seller/contractor perform all activities from beginning till end. (manufacturing from supply & maintenance). And yes, seller is responsible for all the possible risks in this type of contact.
Cost Plus Incentive Fee (CPIF)
The Seller is reimbursed for all costs plus an incentive fee based upon achieving certain performance objectives mentioned in the contract. The Risk lies with the Buyer; however, this Risk is lower than the CPFF contract
- Incentive Fee is calculated using an agreed on a predetermined formula.
- The incentive is a motivating factor for the Seller. If the Seller can complete the work with less cost or before time, he gets some incentive. Conversely, he shares the loss with the Buyer using the same formula. Most of the time, Incentive is a percentage of the savings/loss
Example: The Seller will be paid total cost incurred. If the project is completed under budget, 25% of the saving shall be given to the Seller. If the project is completed over budget, the Seller shall share 25% of the extra cost
Cost Plus Award Fee (CPAF)
The Seller is paid for all his legitimate costs plus some Award Fee which is based on Buyer’s satisfaction of certain broad subjective performance criteria that are defined and incorporated into the contract
- The evaluation of performance is a subjective matter, and Seller cannot appeal it
Example: The Seller will be paid total cost incurred. If the Seller completes the task meeting or exceeding all quality standards, based on his performance, he may be given an award of up to Rs 10 million.
Cost Plus Percentage of Cost (CPPC)
The Seller is paid for all costs incurred plus a percentage of these costs. Like CPFF except that Fee is not fixed; it is tied to the Cost incurred. Preferred by Sellers, not by the Buyers. Rather, added Risk for Buyer that the Seller may artificially increase the cost to earn a higher fee
Example: The Seller will be paid total Costs incurred plus 12% of the Costs incurred as the Seller’s fee
Time & Materials (T&M) Contracts
Aka ‘Times & Means’ Contracts. This is a hybrid contract of Fixed-Price and Cost Reimbursable contracts. The Risk is distributed to both parties
- T&M contract is generally used when the deliverable is human Effort. In this type of contract, the project manager or the organization prescribes the required qualification or experience to the Seller who is responsible for providing the staff
- T&M contract is used to hire some experts or any outside support.
Example: The technician will be paid PRs 1,000 per hour