Cost-Reimbursement Contracts

A Cost-Reimbursement contract (FAR Subpart 16.3) is a type of contract that provides 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. Costs are things that the contractor has to pay for in order to finish the project and reach its goal. This includes the work, the materials, the tools, equipment, and more.

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.

Main Cost-Reimbursement Contract References

Website: FAR Subpart 16.3 Cost-Reimbursement Contracts

Website: DFARS 216.3 “Cost-Reimbursement Contracts

What is a Cost Reimbursement Contract

A cost reimbursement contract is an agreement between parties in executing a project that says the owner will pay the contractor back for any costs they have to pay while working on the project. But there are ceiling limits to how much can be paid back. The contractor doesn’t just get paid for the costs; he or she is also guaranteed an extra amount. The contractor will make a profit from this extra payment. The contract will still have an estimate of how much the whole project will cost.

Purpose of a Cost Reimbursement Contract

A cost reimbursement contract is used to make a deal when the exact cost of the deal can’t be figured out. It might not be possible to know for sure how much certain goods or services will cost over the course of the government contract. In these situations, the government agency will usually agree to a cost-reimbursement contract, in which the agency takes some risk for the final costs. These contracts will 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.

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. In a fixed-price contract, the project’s total cost is agreed upon before work begins, and that price is set in stone. This means that most of the risk lies with the contractor, while in a cost-reimbursement contract, most of the risk lies with the project owner. That doesn’t mean there aren’t other risks, like when requirements aren’t clear, and the project’s scope grows.

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.

Types of Cost-Reimbursement Contracts

There is no one contract for cost reimbursement that works for everyone. The main types of cost-reimbursement contracts are. [1]

Cost Contracts (FAR 16.302): A cost contract is a cost-reimbursement contract in which the contractor receives no fee.
Cost-Sharing Contracts (FAR 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) (FAR 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) (FAR 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) (FAR 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.

Pros and Cons of a Cost Reimbursement Contract

Cost reimbursement contracts are best for projects where the scope isn’t clear and the risk is high since the customer pays for all costs and takes on all the risk. But a cost-reimbursement contract isn’t always the best way for two people to settle a legal dispute. Here are some good things about using a cost-reimbursement contract and some bad things about it:

Positives

Contractors don’t have much of a reason to cut corners.
Ideal when quality is more important than cost
Most of the time, final costs are lower because prices don’t have to be raised to cover contractor risk.

Negatives

The final costs are not known. More oversight is needed to make sure that only agreed-upon costs are paid.
Less reason to be efficient

AcqNotes Tutorials

Other Types of Contracts

– See Firm-Fixed Price Contract
– See Indefinite Delivery Contract
– See Incentive Contract
– See Time and Materials Contract

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Updated: 12/29/2022

Rank: G6.7

Contracts & Legal