Cost-Reimbursement types of contracts (FAR Subpart 16.3) provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of the total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer.
Definition: A cost-reimbursement contract is a contract where all allowable contractor expenses are covered to an agreed-upon limit and an additional payment for a profit.
When to Use a Cost-Reimbursement Contract
A cost-reimbursement contract should be used when there are too many uncertainties in contract performance that will not allow the use of a fixed-price contract.
How to Set-Up a Cost-Reimbursement Contract
A Cost-Reimbursement contract requires the contracting officer to negotiate a “total estimated cost” and payment of a fixed dollar fee to the contractor. The total estimated cost is a contract cost limitation that the contractor cannot exceed, except at the risk of non-reimbursement.
Any cost-reimbursement contract must have a “limitation of cost” or “limitation of funds” clause which will limit the government’s liability if the contractor exceeds the total estimated cost.
The fee cannot be changed unless the government changes the scope of work in the contract.
The main types of cost-reimbursement contracts. 
- Cost Contracts (16.302): A cost contract is a cost-reimbursement contract in which the contractor receives no fee.
- Cost-Sharing Contracts (16.303): A cost-sharing contract is a cost-reimbursement contract in which the contractor receives no fee and is reimbursed only for an agreed-upon portion of its allowable costs.
- Cost-plus-incentive-fee Contracts (CPIF) (16.304): A cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. See Incentive Contracts.
- Cost-plus-award-fee Contracts (CPAF) (16.305): A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of (a) a base amount (which may be zero) fixed at the inception of the contract and (b) an award amount, based upon a judgmental evaluation by the Government, sufficient to provide motivation for excellence in contract performance. See Incentive Contracts.
- Cost-plus-fixed-fee Contracts (CPFF) (16.306): A cost-plus-fixed-fee contract is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost but may be adjusted as a result of changes in the work to be performed under the contract. This contract type permits contracting for efforts that might otherwise present too great a risk to contractors, but it provides the contractor only a minimum incentive to control costs.
Other Types of Contracts
AcqLinks and References:
-  Website: FAR Subpart 16.3 – Cost-Reimbursement Contracts
- GAO Report – Contract Management under Cost Reimbursement Contracts – Sept 2009
- DAU “Comparison of Major Contract Types” – Jan 2014
- Website: Navy Contract Management Process Guide
- Website: FAR Subpart 16 – Contract Types