Contract Compliance Associates

Cost Reimbursable Contracts in General

There are five types of Cost Reimbursable contracts. They are:

1. Cost Contracts
2. Cost-Sharing Contracts
3. Cost-Plus-Incentive-Fee Contracts
4. Cost-Plus-Award-Fee Contracts
5. Cost-Plus-Fixed-Fee Contracts.

Cost-reimbursement types of contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of 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.

Cost Contract Description

A cost contract is a cost-reimbursement contract in which the contractor receives no fee.

Cost Contract Application

A cost contract may be appropriate for research and development work, particularly with nonprofit educational institutions or other nonprofit organizations, and for facilities contracts.

Cost-Sharing Contract Description

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-Sharing Contract Application

A cost-sharing contract may be used when the contractor agrees to absorb a portion of the costs, in the expectation of substantial compensating benefits.

Cost-Plus-Incentive-Fee Contract Description

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.

Cost-Plus-Incentive-Fee Contract Application

A cost-plus-incentive-fee contract is appropriate for services or development and test programs when:

(a) A cost-reimbursement contract is necessary; and

(b) A target cost and a fee adjustment formula can be negotiated that are likely to motivate the contractor to manage effectively.

The contract may include technical performance incentives when it is highly probable that the required development of a major system is feasible and the Government has established its performance objectives, at least in general terms. This approach also may apply to other acquisitions, if the use of both cost and technical performance incentives is desirable and administratively practical.

The fee adjustment formula should provide an incentive that will be effective over the full range of reasonably foreseeable variations from target cost. If a high maximum fee is negotiated, the contract shall also provide for a low minimum fee that may be a zero fee or, in rare cases, a negative fee.

Cost-Plus-Award-Fee Contract Description

A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of:

(a) A base amount fixed at inception of the contract and

(b) An award amount that the contractor may earn in whole or in part during performance and that is sufficient to provide motivation for excellence in such areas as quality, timeliness, technical ingenuity, and cost-effective management.

Cost-Plus-Award-Fee Contract Application

The cost-plus-award-fee contract is suitable for use when:

(a) The work to be performed is such that it is neither feasible nor effective to devise predetermined objective incentive targets applicable to cost, technical performance, or schedule;

(b) The likelihood of meeting acquisition objectives will be enhanced by using a contract that effectively motivates the contractor toward exceptional performance and provides the Government with the flexibility to evaluate both actual performance and the conditions under which it was achieved; and

(c) Any additional administrative effort and cost required to monitor and evaluate performance are justified by the expected benefits.

Cost-Plus-Fixed-Fee Contract Description

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.

Cost-Plus-Fixed-Fee Contract Application

A cost-plus-fixed-fee contract is suitable for use when the conditions of 16.301-2 are present and, for example:

(a) The contract is for the performance of research or preliminary exploration or study, and the level of effort required is unknown; or

(b) The contract is for development and test, and using a cost-plus-incentive-fee contract is not practical.