What is a Cost-Reimbursement Contract?

What is a cost-reimbursement contract (CRC)?

A cost reimbursement contract (CRC) is an agreement where one party agrees to cover the expenses of the other party for a project. These types of contracts specify that the buyer is the one who will cover the costs of the work that needs to be completed. The costs are either straightforward or complex. These contracts can be intricate and come in various formats, making them tricky to manage. Companies need to track estimates, project dates, renewals, and other information.

The final pricing is usually set when all work is completed or by a specific date written in the contract. Usually, this is in agreement with a budget determined by vendor cost estimates which can’t be exceeded without express permission.

How is a cost-reimbursement contract different from a fixed-price contract?

Costs reimbursement agreements are paid to the other party where costs are incurred and invoiced, monthly or quarterly. In a fixed-price contract, the agreements have fixed payments based on a milestone payment schedule or the submission of deliverables. In such types of agreements, the risk lies mostly with the contractor. Whereas, a cost-reimbursement contract places risk more evenly on the project owner.

What are the types of cost-reimbursement contracts?

There are several variations of CRCs, each with its own fee structure that incentivizes different behaviors:

Cost plus fixed fee (CPFF): A cost plus fixed fee is the most straightforward type of cost reimbursement contract. The contractor receives reimbursement for all allowable costs, plus a fixed fee for their profit margin. This fee is typically a percentage of the total estimated project cost and is negotiated up front. The CPFF approach minimizes the financial risk for the contractor as they are guaranteed to recoup all allowable expenses. However, it may not incentivize the contractor to strictly control costs since their profit remains fixed regardless of final project expenditures.

Cost plus incentive fee (CPIF): This type of CRC introduces a performance-based element. The contractor receives reimbursement for allowable costs, but their final fee is determined by achieving pre-defined performance metrics outlined in the contract. These metrics can encompass factors like project schedule adherence, quality benchmarks, or cost savings achieved. The CPIF approach incentivizes the contractor to deliver high-quality work within budget and timeframe constraints, as their profit margin is directly tied to project performance.

Cost sharing: In a cost-sharing agreement, both the buyer and the contractor agree to share the project’s costs according to a predetermined percentage (e.g., 70/30 split). This approach fosters a collaborative environment where both parties are incentivized to control costs and ensure project success. Cost sharing is often used in research and development projects where both parties benefit from the project outcomes.

What are the benefits of cost-reimbursement contracts?

Cost reimbursement contracts offer advantages for both contractors and buyers (often government agencies or large enterprises).

Benefits for contractors:

• Reduced risk: Since the buyer reimburses allowable costs, contractors face less financial risk associated with unexpected project costs that may arise due to unforeseen circumstances.
• Flexibility: CRCs are well-suited for projects with a high degree of uncertainty or a constantly evolving scope. As the project progresses, the contractor can adjust their approach and associated costs without negatively impacting their profit margin (within allowable cost boundaries).
• Focus on quality: Knowing they will be reimbursed for allowable costs, contractors can prioritize delivering high-quality work without being overly concerned about exceeding a fixed budget.

Benefits for buyers:

• Expertise leverage: CRCs allow buyers to tap into the expertise of specialized contractors who may be better equipped to handle complex projects with inherent uncertainties.
• Shared risk and reward (cost sharing): In cost-sharing agreements, both the buyer and the contractor agree to share the project’s costs according to a predetermined percentage. This approach fosters a collaborative environment where both parties are incentivized to control costs and ensure project success. As both parties share the financial burden, the buyer benefits from a potentially more cost-effective approach.
• Potential for cost savings: While not guaranteed, cost reimbursement contracts can sometimes lead to cost savings for the buyer. This can occur if the contractor efficiently manages project resources and completes the project within the estimated scope.

How Airbase helps with cost-reimbursement contracts.​

Airbase is the first modern procure-to-pay software that increases accuracy and accelerates cycle times with AI-powered OCR, reducing risk with secure global payments in 145+ currencies and 200+ countries and closes the books faster with real-time sync to your ERP.

Employee expense reimbursements and vendor management are easier than ever with Airbase, which integrates all types of non-payroll spend, incorporates customizable approval workflows, and easily syncs to a company’s GL. Airbase is the top accounts payable automation system for small to mid-market businesses.