Cost Reimbursable Contracts

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Introduction
As a project manager, one must understand the procurement concepts, regardless of whether you are a buyer or a seller. Needless to say, procurement management helps identify a suitable supplier or contractor to procure goods or services. In most cases, a procurement contract is created. A procurement contract is an agreement in which the buyer agrees to acquire goods or services from a seller in exchange for consideration. A contract is a legally binding agreement between two or more parties. Usually, one party is known as a buyer and the other as the seller. This binding agreement is the key to the buyer and seller relationship and this provides the framework for how they will transact with each other. These contracts are mostly …show more content…

Sometimes this fee will be paid if the seller meets or exceeds the selected project objectives; for example, completing the task before time. A cost reimbursable contract is used when there is uncertainty in the scope, or the risk is higher. With this type of contract the buyer pays for all the cost as he bears the risks. Cost reimbursable contracts can be further divided into four categories; cost plus fixed fee contract (CPFF), cost plus incentive fee contract (CPIF), Cost plus award fee (CPAF) and cost plus percentage of cost (CPPC), Cost …show more content…

The buyer will decide the amount of the award based on an assessment of the contractor’s performance. (Dacuan, 2010). With this type of contract, the seller is paid for all his legitimate costs plus some award fee. This award fee will be based on achieving satisfaction according to certain performance objectives described in the contract. The evaluation of performance is a subjective matter, and it cannot be appealed.
Cost Plus Percentage of Cost (CPPC)
Here the seller is paid for all costs incurred plus a percentage of these costs. This type of contract is not preferred by the buyer because the seller might artificially increase the cost to earn a higher profit.
Cost Sharing
A cost sharing contract is a cost-reimbursement contract in which the contractor receives no additional fee and is reimbursed only for an agreed upon portion of those expenses. With this type of contract an arrangement is made both the buyer and seller to share the cost of the project, using an agreed calculation. A contractor should only enter a cost-sharing contract if the work will benefit the company in other ways sufficient to offset the shared expenditures. (Dacuan,

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