Cost-Reimbursement Contract

A cost-reimbursement contract is a contract under which the contractor is paid the allowable costs it actually incurs, as prescribed by the contract. The buyer does not pay a fixed price for a defined deliverable. It reimburses the costs the contractor can show were incurred and allowed under the contract terms. The US Federal Acquisition Regulation describes the arrangement this way in Subpart 16.3.

The Government of Canada uses the equivalent term cost-reimbursable contract. CanadaBuys describes it as a basis of payment that reimburses the contractor for allowable costs incurred during contract performance. Suppliers will see both terms, and in Canadian buyer guidance they refer to the same payment approach. The details below follow the CanadaBuys guidance on the cost-reimbursable basis of payment.

How reimbursement of allowable costs works

Under the FAR definition, a cost-reimbursement contract normally establishes an estimated total cost and a ceiling that the contractor may not exceed without the contracting officer's approval. The contractor is paid for costs that are both incurred and allowable. A cost that the contract does not allow is not reimbursed, even if the contractor spent the money.

The family of cost-reimbursement contract types includes cost contracts, cost-sharing contracts and incentive-based arrangements. A cost contract is a cost-reimbursement contract in which the contractor receives no fee.

Canadian guidance distinguishes several arrangements:

• actual-cost reimbursement without a profit fee;
• target cost and incentive-fee arrangements;
• cost-reimbursement with or without a maximum price; and
• cost-reimbursement with a fee based on actual costs.

When Canada uses a cost-reimbursable basis of payment

CanadaBuys says buyers should use a cost-reimbursable basis primarily when the scope or requirements of the work are uncertain. In those cases a firm price cannot reasonably be estimated, and the basis allows risk to be allocated fairly between Canada and the contractor.

The guidance sets conditions that must be in place before a buyer chooses this basis:

• the contractor's accounting system must be adequate to determine the costs that apply to the contract;
• government resources must be available to manage and validate the costs claimed; and
• validation mechanisms must operate both during and after performance.

Cost limits, audit and finalization of cost

CanadaBuys requires suitable cost-limit and audit provisions in these contracts. Depending on the arrangement, they include a limitation of expenditure clause, a ceiling price clause and an audit clause. These clauses cap what Canada can be asked to pay and give it the right to verify what was claimed.

The CanadaBuys guidance on managing cost-reimbursable contracts states that all cost-reimbursable contracts require a cost submission at completion. Multi-year contracts generally require an annual cost submission as well, except for repair and overhaul services. For contracts exceeding $50,000 with Canadian businesses, the audit provision allows Canada to determine the actual costs incurred and whether the final cost is reasonable.

After completion and reconciliation, the agreed final price is formalized through a finalization of cost amendment. It adjusts the contract price to the final amount and states that no further claims may be submitted. The buyer must certify that the final charged price is reasonable and consistent with the contract, using audit findings where applicable.

What it means for a supplier bidding on Canadian public contracts

A supplier working under a cost-reimbursable contract carries specific obligations. According to the CanadaBuys guidance, the supplier must:

• claim only costs that are allowable under the contract;
• maintain an accounting system that identifies the costs applicable to the contract;
• submit the required cost information at completion and, where applicable, annually;
• support cost validation or audit; and
• stay within the applicable expenditure limit, ceiling price and other contractual controls.

Bid teams should confirm before bidding that their accounting records can separate contract costs and withstand an audit. They should also read the limitation of expenditure and ceiling price clauses closely, because costs above the limit are not reimbursed without authorization.