When cost reimbursement contract is used?

This is sometimes known as ‘cost plus’ or ‘all daywork’. The essence is that the

contractor is paid for all his direct inputs by way of labour, plant and materials at the

market prices which he pays, subject to definitions about such matters as labour

allowances, standing time of plant and discounts on materials. He is also paid

amounts for site and head office overheads and profit. These may be calculated as

lump amounts or percentages of the direct inputs; they are the ‘plus’ on the ‘cost’.

Elements of work within other financial bases may be reimbursed similarly, when the

term ‘daywork’ is used.

The approach is useful when the data or time for even approximate quantities is

lacking. This may happen with unpredictable alterations work or where other

overriding conditions of working are undefined. Cost control needs special attention,

as the contractor has no prima facie incentive to economise. Usually there are some

limited rights to control the extent of provision which the contractor is making on

site, most likely in terms of labour and plant.

The other main avenue of control is in the formula embodied for calculating the ‘plus’

or fee element. Broad structures are:

1. Variable percentage fee. One or more percentages are added to the prime cost

amounts, so that the fee varies with the total expended. It may be arranged on a

sliding scale, so that the percentage drops as the total increases. Here there is

no formula incentive to economy, but it is the only practicable method when

the extent of work is unknown.

2. Fixed fee. A lump sum fee is paid in addition to the prime cost. This puts some

pressure on the contractor to economise, as he receives a lower percentage

margin as his expenditure increases, eventually to the point where his profit

becomes negative. He still receives all of his prime cost whatever happens. The

method suits reasonably defined work.

3. Target cost. This takes various forms. In essence it requires an estimate of the

target cost of the works to be agreed before work begins and to be revised to

allow for variations, etc. A fee (established either on a lump sum or a

percentage basis) and a percentage addition for profit are also agreed in

advance. The actual cost of work, inclusive of the fee and overheads, is set

against the target and an adjustment is made for the difference. This may be by

sharing the amount between the parties, most usual if there is a saving, or the

whole being borne by the contractor, sometimes done if there is an overrun.

This requires the closest definition of work.

Prime cost contracting gives the greatest uncertainty for the client, but may be

inevitable. It may be questioned why the system should be used at all when an

estimate based on measurement (that is payment for output and not input) is valid to

control it. Some clients find that the system gives them better control of time in

particular and still good cost control, when using a reliable contractor. They may

secure this by continuous working from job to job, or by maintaining a shortlist of

firms and dropping poor performers.

As performance is the critical feature, negotiation is more often used than competition

to engage a contractor.