Ironclad Journal icon IRONCLAD JOURNAL

Managing your cost-reimbursement contracts

Two people agreeing on a cost reimbursement contract

A cost-reimbursement contract is an agreement between two parties to provide payment for allowable costs incurred by the other party. The final pricing of the deal is determined later based on the underlying deal and the actual costs it took to complete a project. There are several forms of cost-reimbursement contracts, each of which creates unique challenges when trying to manage them. Your business needs to track complex information like estimates, project dates, renewals, and much more.

Contract management software is the solution to handling your cost-reimbursement agreements. It can track these agreements and improve your processes throughout the contract management lifecycle. You can utilize standardized forms that require little editing to complete the next deal. You can even sign electronically to further streamline the contract acceptance process. There are tools available to better manage your cost-reimbursement contracts throughout your business.

What is a cost-reimbursement contract?

A cost-reimbursement contract requires a buyer to cover the costs of any work that is completed. These costs may be both direct and indirect. The final pricing is determined once the project is finished or on a date set in the contract. In most cases, the vendor provides a cost estimate that helps determine the total budget for the project. The prime contractor is usually not permitted to exceed this estimate without permission.

Cost reimbursement contracts come in many forms, including:

  • Cost contracts: The contract only requires payment for the actual costs of the project. There are no additional fees.
  • Cost-sharing contracts: The contractor agrees to assume and share some of the contract expenses. The customer will then reimburse the contractor for a certain portion of the expenses.
  • Cost-plus-fixed fee (CPFF) contracts: Here, the contractor receives reimbursement plus a predetermined fee. This fee is negotiated when the contract is finalized and will not change depending on the project cost. Revisions could occur if the work originally in the agreement changes in the course of the project.
  • Cost-plus-incentive-fee (CPIF) contracts: The contractor receives reimbursement and an adjustable fee. This adjustment is based on established targets, and the fee is based on a formula designed to reward lower costs.
  • Cost-plus-award-fee (CPAF) contracts: The contractor will receive reimbursement with a fixed fee and the potential to earn an additional fee. This is based on an assessment of the contractor’s performance on the project.
  • Cost-plus-percentage-of-cost (CPPC) contracts: With these agreements, the seller is paid for all costs plus an additional percentage of those costs.

Examples of cost-reimbursement contracts

Cost-reimbursement agreements are common with many types of contractors. Contractors in the construction industry use these contracts on a frequent basis. The same is true for any company that develops software or another product. The costs of these undertakings can be high, and businesses wants to protect their potential profits. A cost-reimbursement contract is often a great tool to accomplish that goal.

Cost-reimbursement contracts are also common in government agreements. The Federal government and various state governments commonly utilize these contracts when working with contractors and other businesses.

The purpose of a cost-reimbursement contract

Cost-reimbursement contracts exist to protect sellers and their profit margins. Instead of taking on all the risks of a project, you can shift the burden to the buyer. This means your company will have a better understanding of the earnings you will receive from a project. The various types of agreements also give the parties flexibility. They can choose to share costs, offer incentives, and seek to reduce the total cost of the project.

When do I need a cost-reimbursement contract?

Your business needs a cost-reimbursement contract when you want to shift the burden of paying for project costs to the buyer. This type of agreement helps you better plan the revenue you will get from the project. Instead of taking on the risk of the costs—which could significantly reduce your revenue—you can better ensure you are profiting from this deal.

A cost-reimbursement contract puts you in control, even when a project might otherwise be a risky endeavor. You can develop, create, and work to complete the project the best way you know how instead of worrying about the cost.

Parts of a cost-reimbursement contract

A cost-reimbursement contract should be drafted to include some important provisions. The requirements for your specific contract will depend on many factors including the type of agreement, the buyer, and the legal rules that apply to your jurisdiction. A typical cost-reimbursement contract should include the following:

Type of cost-reimbursement agreement

The contract should specify what type of contract it is. It should determine if the costs are paid with any additional fees, if there are incentives, or if any other part of the deal determines the exact type of cost-reimbursement contract used.

Cost estimates

Most cost-reimbursement agreements offer an estimate for the costs. The seller should work hard to provide an accurate estimate to include in the contract. The agreement should also include what will occur if the project meets or begins to exceed this estimate. This would include any provisions on how to approve additional costs and payment for them.

Total project value

The contractor or seller wants to know how much they will be paid for their services in addition to their costs. This is the true value of the deal for most cost-reimbursement contracts. This amount should be clear whether it is a fixed amount or based on a specific formula.

Definition of coverable costs

The agreement should outline the types of costs that the buyer must cover. The agreement should be specific and capture any costs that the seller is likely to incur. If cost-sharing is to occur, the contract should clearly delineate which party pays for what type of costs.

Legal boilerplate

The agreement is still a contract. In addition to all of the cost-reimbursement-specific language, it should include provisions that:

  • Identify the parties
  • Include contact information
  • Set breach of contract standards or liquidated damages
  • Set an effective date for the agreement
  • Contain signature lines

These and many other provisions are still necessary to enforce these complex agreements. Once your business has an approved form contract from your legal team, you can save a great deal of time and revenue with future agreements.

Limitations of a cost-reimbursement contract

A cost-reimbursement contract puts the risk on the seller if the buyer falls through on their obligations. If the buyer fails to pay the costs as agreed in the contract, the seller could be out the value of the deal. The seller is required to pay the costs upfront and is only compensated at a later date. This means that creating an enforceable agreement and tracking it effectively is essential to overcoming these potential limitations.

How to create a cost-reimbursement contract

You can create an effective cost-reimbursement contract using template software that lets you build your agreement. From this starting point, you can then change and modify the agreement to fit your needs. The standardized cost-reimbursement contract saves you significant time and money when making new deals. Instead of creating new contracts from scratch, you can streamline and even self-manage these agreements.

While cost-reimbursement contracts may require changing the terms to meet the needs of this project, there is a lot of language that does not need to change. When it does change, you want software that tracks the differences and provides detailed metrics to assist you with contract management.

Managing cost-reimbursement contracts

Companies using cost-reimbursement contracts often find it difficult to manage them effectively. They need to track details unique to the deal like project estimates, total costs, and the type of reimbursement contract. There is a lot of data in these contracts that can be impossible to track without unsophisticated software. Ironclad’s contract management technology provides you with essential contract data reporting that keeps you in the know.

You can manage contracts quickly and visual processing with easy-to-read visuals and data reporting. The Ironclad software utilizes the Contract Data Repository, which grants you easy access to information like:

  • Workflow suggestions
  • Total project cost
  • Party information
  • Cost-reimbursement formulas
  • Start and end dates for the contract
  • Terms and conditions
  • Template and automation suggestions

Why cost-reimbursement contracts can be time-consuming

Cost-reimbursement contracts are highly detailed and often specific to the parties. Other retention and contract management methods make it difficult to identify important differences in these contracts. With the right software, your company can manage all of these details to help protect your project.

Why cost-reimbursement contracts are hard to manage

Some businesses are focused on their projects and not focused enough on managing their agreements. They may still utilize file cabinets or unsophisticated contract management software. This often leads to lost agreements or unenforceable contracts.

Automating workflows for cost-reimbursement contracts

The Ironclad Workflow Designer tool lets you automate your cost-reimbursement contracts. With this automation, you can streamline your contracting processes by 80% or more. Now you can focus on your actual project rather than contract management difficulties.

The solution to your cost-reimbursement contract needs

Ironclad gives you the technology you require to manage cost-reimbursement contracts. You are able to manage and create standardized agreements. Our customized tools can help you track and modify these contracts, including:

Why use digital contract management for cost-reimbursement contracts?

Cost-reimbursement contracts are the lifeblood of your business. They help ensure you get paid for the costs of your project. They protect your revenue and bring you success when they are properly managed. You can effectively manage your cost-reimbursement agreements and reduce the risks associated with these contracts.

Try a free demo of Ironclad now to start managing your cost-reimbursement contracts. We are here to help you.

Want more content like this? Sign up for our monthly newsletter.

Book your live demo