Project managment

Cost reimbursement contracts

These contracts have been in use for many years on projects which involve unforeseeable amounts or kinds of work – such as the repair of a dam or collapsed tunnel, or repair of sea defences. Payment to the contractor is usually on the basis of: (i) direct costs of materials, labour and plant used on the site; plus (ii) a percentage addition for overhead costs; plus (iii) a fixed fee, or further percentage on for profit. Often a cost reimbursement contract for specialist work is negotiated with a suitably experienced contractor. If competitive bidding is required this would be based on comparison of contractors’ quotations for overheads and profit. The advantage is that the promoter’s engineer in charge of the project can work in partnership with the contractor to devise the cheapest means of overcoming problems. The main disadvantage for a promoter is that he carries all the risk of cost overruns, while the contractor is assured of his profit and fees. Where the works can be reasonably well defined, it may be best to use a measurement type of contract with a contingency sum allowed for any changes found necessary.
Sometimes a target cost is set under a cost reimbursement contract, the contractor sharing in any savings or excesses on the target cost. This gives the contractor an incentive to be efficient; but problems can arise if the target has to be altered because the work found necessary differs from that expected (see Section 3.1(e)).

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