Cost reimbursement

In recent years a number of employers have taken to using cost reimbursement
terms for payment; often with a target cost (see Section 3.1(e)). In such
contracts the contractor records his costs on an ‘open book’ basis so the
employer can check and audit the books to confirm the validity of the costs to
be paid to the contractor. Costs are normally recorded by computer and can
be onerous to check as compared with a bill-of-quantities contract or other
method of valuing work. Checking is thus often on a sampling basis, checking
different categories of expenditure each month and concentrating on major
costs with the intent of covering all important matters before a final account
is agreed.

Some items of cost may be pre-agreed in the contract, or agreed subsequently
as applicable to the whole contract, such as any fee, staff salaries,
insurance, head office costs and use of contractor’s own plant. The coverage
of any such items must be clear to avoid possible duplication. Other costs will
need to be checked in detail to ensure they were expended for the works and
were reasonable in extent. Labour must be checked against wage sheets and
the labour records held by the engineer’s site staff. Hired plant can be checked
against invoices, but the charge for contractor-owned plant, if not agreed in
advance, may need checking by a specialist who has to allow for depreciation,
maintenance and other costs and avoid any duplication of profit. Materials
invoices must relate to actual materials used and discounts must be allowed
for. Sub-contractors’ quotations may need to be agreed in advance of the
award of contract, to satisfy the employer that the prices are competitive and
the terms acceptable.
Where a target cost has been set, it is necessary to keep a rolling check of costs
incurred against the proportion of the target work done, so as to identify any
significant differences and thus allow steps to be taken to investigate cost
increases and look for means of reducing any over-run.