Cost-Reimbursable Contracts
Cost-reimbursable contracts are agreements where the buyer reimburses the seller for all legitimate actual costs incurred in performing the work, plus a fee representing the seller's profit.
Explanation
Cost-reimbursable contracts place the majority of cost risk on the buyer. The seller is paid for actual allowable costs plus an additional fee, so if costs increase, the buyer pays more. This contract type is appropriate when the scope of work cannot be precisely defined at the outset, such as in research and development, new technology projects, or situations with significant uncertainty.
The three main subtypes are Cost Plus Fixed Fee (CPFF), Cost Plus Incentive Fee (CPIF), and Cost Plus Award Fee (CPAF). Each differs in how the fee component is determined. All cost-reimbursable contracts require the buyer to have systems in place to monitor and audit the seller's costs.
Cost-reimbursable contracts provide maximum flexibility for scope changes and evolving requirements. However, they require more buyer oversight than fixed-price contracts because the buyer needs to verify that claimed costs are reasonable and allowable. The buyer should define allowable costs, audit requirements, and reporting standards in the contract.
Key Points
- •Buyer bears the majority of cost risk
- •Seller is reimbursed for actual costs plus a fee
- •Three subtypes: CPFF, CPIF, and CPAF
- •Best suited for undefined or evolving scope
Exam Tip
Cost-reimbursable contracts transfer cost risk to the buyer. They are used when scope is uncertain. The buyer must actively monitor seller costs. This is the opposite of fixed-price risk allocation.
Frequently Asked Questions
Related Topics
Cost Plus Fixed Fee (CPFF)
A Cost Plus Fixed Fee (CPFF) contract reimburses the seller for all allowable costs and pays a fixed fee (profit) that does not change regardless of actual costs.
Cost Plus Incentive Fee (CPIF)
A Cost Plus Incentive Fee (CPIF) contract reimburses the seller for allowable costs and includes an incentive fee that adjusts based on the seller's performance against agreed-upon cost targets.
Cost Plus Award Fee (CPAF)
A Cost Plus Award Fee (CPAF) contract reimburses the seller for allowable costs plus an award fee based on the buyer's subjective evaluation of the seller's performance.
Fixed-Price Contracts
Fixed-price contracts are a category of agreements where the seller is paid a set price for delivering a defined product or service, regardless of the seller's actual costs.
Procurement Strategy
Procurement strategy defines the project delivery method, the type of legally binding agreement, and the approach for managing procurements throughout the project lifecycle.
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