cost-reimbursable contracts in

Question

Cost-reimbursable contracts 

In cost-reimbursable contracts you pay the contractor the costs necessarily incurred in the construction plus a fee. The latter portion viz. the fee can be fixed in a number of ways which we will discuss later in this section. The main reasons for adopting this mode of contracting are: 

• At the time of contracting, the scope of the work is indeterminate or highly uncertain and the kind of labour, material and equipment needed are also uncertain. 
• At the time of contracting, you are unable to finalise the plans and specifications for the project.  
• At the time of contracting, you are not certain whether the construction project will be completed in full. 
• Cost-reimbursable contracts offer an easy response to unexpected conditions arising during project implementation. 
• Under this arrangement complete records of all time and materials spent by the contractor must be maintained. (These types of contracts are also called Time and Material contracts or Cost-plus contracts). Evidently the  risk of cost increase in the project depends entirely upon you. 

The most important question that should be resolved for finalising cost-reimbursable contracts is to identify the following costs: 

• Reimbursable costs (costs that are reimbursable to contractor that is. costs that are necessarily incurred in the performance of the work). 
• Non-reimbursable costs (costs that are not reimbursable to contractor). 
• Costs that are included in the base figure which is agreed as the basis for determining the fee. 

Typically these costs comprise the following elements: 

• Reimbursable costs (that is. costs that are necessarily incurred in the performance of the work), which includes: 

 

1. Wages, payroll taxes and fringe benefits. 
2. Cost of all materials, supplies and equipment including the costs of transportation, unloading thereof. 
3. Payments to subcontractors. 
4. Rental and maintenance charges for all equipment, trucks and hand tools. 
5. Cost of salaries of all contractor?s staff stationed at the field office. 
6. Cost of salaries of contractor?s staff utilised for expediting of supplies, supervising of transportation and so on calculated for time specifically spent on the project. 
7. Cost of travel and travel incidentals of contractor?s staff directly incurred on the project. 
8. Premiums of all bonds and insurances incurred by contractor for the work. 
9. Permit fees. 
10. Cost incurred for communication that is, telephone, electronic communication and so on and for stationery at site. 
11. Cost of temporary site facilities like removal of debris. 
12. Losses and expenses not compensated by insurance which result from causes other than the fault or negligence of the contractor. 

Non-reimbursable costs which includes:

1. Salaries or other compensation for the contractor?s officers and employees while working at the contractor?s main office or branch offices. 
2. Expenses of the contractor?s principal or branch offices other than the field office. 
3. Any capital expenses including interest on the contractor?s capital and any additional capital required to perform the work. 
4. All general overhead expenses.

Costs due to negligence of the contractor, subcontractors, or anyone directly employed by the contractor. While the above list is typical, there can be some variations to the list depending on the agreement between owner and contractor. But the contract should make these costs clear in order to avoid disputes.