Reimbursable Contracts

RT-260 Topic Summary
RT 260

Overview

Lack of defined scope, significant project complexity and risk, owner and contractor staffing considerations, and schedule pressures often compel owners to consider reimbursable contracting methods for their projects. Owners face a steep learning curve when they first employ reimbursable (or any other) contracting. To help those new to reimbursable contracting avoid many pitfalls and to implement it successfully, CII commissioned RT-260 to investigate what makes a reimbursable contract successful for both the owner and the contractor.

Using research team expertise, questionnaires, CII Benchmarking and Metrics data and case studies, RT-260 identified key findings for the reimbursable contracting process in six categories:

  • Contracting Strategy Selection
  • Risk Allocation Strategy
  • Contract Development
  • Contractor Selection Process
  • Contract Management
  • Reimbursable Contract Control

Clear definition of the cost reimbursement compensation structure is of critical importance in reimbursable contracting. This, strong project controls, personnel experienced in reimbursable contracting, transparency, and integrated owner-contractor decision-making increase the potential for successful reimbursable contracting outcomes.

Key Findings and Implementation Tools

1 : Reimbursable Contracting Strategies

Six different reimbursable contracting strategies are identified and described: (IR260-2, p. 11):

  • Cost Plus Percentage Fee
  • Cost Plus Incentive Fee
  • Cost Plus Award Fee
  • Cost Plus Fixed Fee
  • Cost Plus with a Guaranteed Maximum Price
  • Convertible Reimbursable
Reference: (IR260-2)

2 : Specific Project Characteristics for Selecting Contracting Strategies

Specific characteristics of the project will combine to make reimbursable contracting a more suitable contracting strategy than a lump-sum or other fixed-price strategy. Key characteristics are described in the following four categories:

  • Project uncertainty/risk
  • Time, performance, and quality
  • Degree of desired owner involvement
  • Contracting strategy selection/implementation and project timing

Each characteristic was assessed by industry experts for its affinity towards reimbursable vs. fixed-price contracting. These results are captured in the Contract Strategy Selection Matrix shown as Table 2 in the Implementation Resource. (IR260-2, p. 15)


 
Reference: (IR260-2)

3 : Risk Associated with Reimbursable and Lump-Sum Contracts

Risks on a reimbursable contract are allocated differently than on a lump-sum contract. Twenty-four of the most frequently misallocated or negotiated risks and contract clauses were assessed by industry experts as to how much risk should be allocated to the owner, contractor, or shared under either a reimbursable or lump-sum contract. (IR260-2, p. 29)

Reference: (IR260-2)

4 : Major Elements Addressed in Contract Development

Eight major elements that should be addressed during reimbursable contract development, as listed below, are described in detail. Clearly defining the cost reimbursement compensation structure is critical to success: (IR260-2, p. 41)

  • Scope of work
  • Compensation structure
  • Payment basis
  • Invoicing, record-keeping and auditing
  • Change order procedures
  • Project controls
  • Incentives
  • Warranty
Reference: (IR260-2)

5 : Criteria and Methods for Contractor Evaluation/Selection

The criteria and associated methods for evaluating and selecting the project contractor differ significantly between lump-sum and reimbursable contracts. This is because:

  1. The reimbursable contractor is not required to assess lump-sum risk, obtain third-party pricing, or develop contingency pricing.
  2. The owner may require the reimbursable contractor to provide detailed information about cost elements and mark-ups. 

Also, reimbursable contracting places more emphasis on contractor expertise, experience on similar projects, availability of key personnel, and ability to meet project schedule. 

Reference: (IR260-2)

6 : Differences in Contract Management Approaches Between Reimbursable and Lump-Sum Contracts

Differences in contract management practices for reimbursable and lump-sum contracts are described in the following six general areas: (IR260-2, p. 77)

  • Organization and governance
  • Change management
  • Invoicing and payment
  • Record-keeping
  • Auditing
  • Reimbursable procurement and subcontracting
Reference: (IR260-2)

7 : Project Controls Differences Between Reimbursable and Lump-Sum Contracts

Differences in project controls on reimbursable and lump-sum contracts are driven largely by the owner’s cost responsibility and increased stake in how effectively the scope of work is executed. This drives much greater transparency and more exchange of information between the owner and contractor. The owner will also have significantly more involvement in day-to-day decision making on the project. (IR260-2, p. 93)
Reference: (IR260-2)

8 : Implementation Tool #1

IR260-2, CII Guide to Reimbursable Contracting

Provides detailed information on reimbursable contracting, differences between it and lump-sum contracting methods, and recommendations and considerations for developing, awarding, and executing successful reimbursable contracts. The Guide is supported by a spreadsheet tool “Reimbursable Contracting Matrix” which can be used to identify which general method reimbursable or lump-sum is the more appropriate based on specific project characteristics. Also included in Appendix A of this implementation resource are eight case studies of the discussed contracting practices.
Reference: (IR260-2)

Key Performance Indicators

Improved project cost , Improved project schedule, Improved project performance

Research Publications

Factors that Differentiate Reimbursable Contracting from Lump Sum Contracting - RR260-11

Publication Date: 03/2012 Type: Research Report Pages: Status:

Reimbursable Contracts - RS260-1

Publication Date: 07/2011 Type: Research Summary Pages: 30 Status: Supporting Product

CII Guide to Reimbursable Contracting - IR260-2

Publication Date: 07/2011 Type: Implementation Resource Pages: 154 Status: Tool


Supporting Resources

Presentations (CII Annual Conference & Workshops)

Plenary Session - Busting Myths about Reimbursable Contracts

Publication Date: 06/2011 Presenter: Number of Slides: 13 Event Code: AC11

Implementation Session - Busting Myths about Reimbursable Contracts

Publication Date: 06/2011 Presenter: Number of Slides: 37 Event Code: AC11


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