A cost plus fixed fee contract, also known as a cost reimbursement contract, is a type of procurement agreement commonly used in construction and engineering projects. In this type of contract, the contractor is reimbursed for all allowable expenses incurred during the project, plus a fixed fee for their services.
The fixed fee is added to the overall cost of the project and is predetermined at the time of contract negotiation. It is typically calculated as a percentage of the total cost of the project, which is known as the cost base. The cost base is the sum of all direct and indirect expenses incurred by the contractor during the project, including labor, materials, equipment, overhead, and any other costs incurred.
The cost plus fixed fee contract is a flexible agreement that allows the contractor to adjust to changes in the project scope, timeline, or budget. The contractor is incentivized to keep the project costs as low as possible, as their fixed fee is predetermined and does not change regardless of the final project cost. On the other hand, the owner has the assurance that the contractor has no incentive to exaggerate the project costs, as the contract limits the fee to a fixed percentage of the total cost.
The cost plus fixed fee contract is often used in complex projects where the scope and requirements may change during the course of the project. It offers a higher degree of flexibility than other types of contracts, such as fixed-price contracts, where the contractor assumes the risk of potential cost overruns. In a cost plus fixed fee contract, the owner assumes the risk of cost overruns, but is able to closely manage the project and control costs through regular reporting and monitoring of expenses.
One potential downside of a cost plus fixed fee contract is that it may not provide enough incentives for the contractor to complete the project on time and within budget. Since the fixed fee is predetermined, the contractor may not be as motivated to find cost-saving measures or complete the project ahead of schedule. However, this can be managed with a well-defined project scope, detailed reporting requirements, and clear milestones and deadlines.
In conclusion, a cost plus fixed fee contract is a flexible procurement agreement that allows the contractor to be reimbursed for all allowable expenses plus a fixed fee for their services. It is often used in complex projects where the scope and requirements may change during the course of the project. This type of contract provides flexibility and assurance to both the contractor and the owner, but it requires careful management and monitoring to ensure that the project is completed on time and within budget.