Project managment

Methods of payment under different types of contract

———-(a) Rates only contracts
———-(b) Rates and prices for re-measurement contracts
———-(c) Lump sum contracts
———-(d) Cost reimbursement contracts:

Under a reimbursable contract the contractor is usually reimbursed his expenditure monthly on submission of his accounts, which must include evidence of payments made to suppliers of materials, gross wages paid to employees, and hours operated by plant. The invoices for materials have to be checked to ensure they are materials used on site. Plant rates have to be pre-agreed, and different rates may apply for plant ‘standing’ or ‘working’; with lump sums payable for bringing plant to site and taking it away. Where a fixed fee has been agreed for his overheads and profit, this is usually paid in stages as the contract sets out.
Chapter 1, Section 1.3 describes the advantages and disadvantages of cost reimbursement contracts which are normally adopted only for work whose nature or extent is not defined in advance. The contractor usually remains responsible for constructing the works, his methods and expenditure being agreed with the employer, or on a day-to-day basis with the employer’s project manager or resident engineer on site. An employer may be reluctant to adopt a cost reimbursement arrangement because the cost outcome is uncertain and the employer has to rely on the contractor to be efficient and not waste money. These objections can be overcome to some extent by adopting a target cost approach as described below.
Under any cost reimbursement contract it is essential to detail just what costs are to be paid, and which are covered by the fees or other sums. It may also be necessary to identify the risks carried by each party to determine whether some costs are to be excluded. For example, does the employer pay all costs if bad weather delays work? In part this can be achieved by a close definition of which costs will be reimbursed and which will not. Examples of possible wording to achieve this are given in the IChemE ‘Green Book’ conditions (see Section 4.5), and in the Schedule of Cost Components included in the ICE ‘Engineering and Construction Contract’ (see Section 4.2(f)). Care must be taken to ensure the wording adopted is clear. For complex works it may be necessary to carry out a risk assessment to identify potential problems and allocate the risks to either party.
———-(e) Target contracts
———-(f) Payment under design, build and operate contracts

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