A Cost-Reimbursable Contract is a contract type where the buyer pays the seller for actual costs incurred, plus an additional fee that typically represents the seller’s profit. These contracts are commonly used when project scope is uncertain or evolving, requiring flexibility in cost management.
Key Aspects of Cost-Reimbursable Contracts
- Covers Actual Costs – The seller is reimbursed for allowable project expenses.
- Includes Seller Profit Fee – The seller receives additional compensation, either as a fixed amount or based on performance.
- Allows Flexibility in Scope – Used when final project costs cannot be accurately estimated upfront.
- Requires Cost Transparency – The seller must track and justify all expenditures.
Types of Cost-Reimbursable Contracts
| Contract Type | Description |
|---|---|
| Cost-Plus-Fixed-Fee (CPFF) | Seller is reimbursed for costs plus a predetermined fixed profit fee. |
| Cost-Plus-Award-Fee (CPAF) | Seller is reimbursed for costs plus an award fee based on performance criteria. |
| Cost-Plus-Incentive-Fee (CPIF) | Seller is reimbursed for costs plus an incentive fee linked to cost or performance targets. |
Example Scenarios
Aerospace & Defense
A military contractor is awarded a Cost-Reimbursable Contract to develop new defense technology, where costs are reimbursed and the firm receives a fixed profit fee.
Research & Development
A biotech company enters into a cost-reimbursable agreement with a pharmaceutical firm for experimental drug research, ensuring that research expenses are covered while allowing for scientific uncertainties.
Infrastructure Project
A government agency hires a construction company to build a major bridge, using a cost-reimbursable model to adjust for unforeseen material and labor costs.
Why Cost-Reimbursable Contracts Matter
- Provides Financial Flexibility – Supports projects where costs are difficult to estimate.
- Encourages Innovation & R&D – Used in high-risk projects where rigid pricing models would discourage participation.
- Ensures Cost Transparency – Requires detailed expense tracking and justification.
- Balances Risk Between Buyer & Seller – The buyer assumes more financial risk, while the seller ensures delivery.
See also: Cost-Plus-Fixed-Fee (CPFF) Contract, Cost-Plus-Award-Fee (CPAF) Contract, Cost-Plus-Incentive-Fee (CPIF) Contract, Procurement Management Plan.