Cost Reimbursable Contracts

These contract types pay the seller for the product. In the payment to the seller, there is a profit margin—the difference between the actual costs of the product and the sales amount. The actual costs of the product fall into two categories:

• Direct costs Costs incurred by the project in order for the project to exist. Examples include equipment needed to complete the project work, salaries of the project team, and other expenses tied directly to the project's existence.

• Indirect costs Costs attributed to the cost of doing business. Examples include utilities, office space, and other overhead costs.

Cost-reimbursable contracts require the buyer to assume the risk of cost overruns. There are three types of cost-reimbursable contracts:

• Cost plus fixed fee hurricane or other natural disaster.

hurricane or other natural disaster.

Figure 12-2

Fixed-price contracts transfer risk to the seller.

Buyer's Risk

Cost Plus Percentage of Costs

Highest Risk

Cost Plus Fixed Fee

Cost Plus Incentive Fee

Fixed-Price

Highest Risk

Cost Plus Fixed Fee

Cost Plus Incentive Fee

Fixed-Price

Time and Materials

Time and Materials

T&M can be a high risk for buyer if contract does not include a "total not-to-exceed" clause, also called an NTE clause.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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