The major two contract types in government procurement are cost reimbursement contracts (or cost plus), and performance reimbursement contracts (or fixed price).
The major difference between them is that the cost plus contracts are usually those of indefinite delivery, and the contractor is paid a percent in addition to labour and materials cost.
A cost reimbursement contract requires an agency to pay the contractor’s expenses for the execution of work plus a profit previously agreed upon. It means that an agency has to apply a specific percentage to the actual labor and materials cost to be paid to the contractor. Consequently, such contracts usually involve some financial and technical uncertainty.
Though they allow more flexibility in the project execution, some percentage of risk on the project is laid on the agency when a cost reimbursement contract is used. In addition, such a contract requires the agency’s constant monitoring of contractor’s spending in order to ensure that the funding is being spent adequately and appropriately.
Cost Reimbursement Contracts in US Procurement
Cost reimbursement contracts are usually used when it is difficult to estimate the final cost and timing of the project, in particular in construction, research and development fields. A bright example of such an approach is a recent NASA contract for constellation spacesuit for the moon.
Obviously, they chose this type of contracting because for such a long-term development project it is rather difficult to estimate all the potential expenses. On the other hand, however, they will have to constantly maintain detailed records on all the cost and materials spent by the contractor.
As a result, such contracts require from the agency much attention, constant and close supervision. Besides, the agency is exposed to a number of risks, and, consequently, cannot adequately plan its budgeting and strategic development.
Cost Reimbursement vs. Performance Reimbursement
- While cost reimbursement contracts require constant supervision and involve a great number of risks caused by the uncertainty of potential results and a great number of variables and possible changes, the fixed price contracts provide both the contractor and the buyer with clear and definite goals to be reached by the specified deadlines.
- Compared to cost reimbursement model, the performance reimbursement contracts provide an agency with more clarity and definite tools for time and cost management.
- While a cost reimbursement contract requires an agency to pay the market price, the performance reimbursement contract would save costs by paying the negotiated fixed price during the whole duration of the project execution, for the fixed volume of service.
The terms of both cost and performance reimbursement contracting are regulated by Federal Acquisition Regulations that are applied to all executive-agency acquisitions (GSA).