Overview
Cost-reimbursement contracts provide for the payment of allowable incurred costs up to a specified ceiling, serving as the primary vehicle for high-risk projects where requirements or costs cannot be accurately estimated. These contracts shift the financial risk of performance uncertainties from the contractor to the Government, provided the contractor's costs are allowable and within the obligated funding limits.
Key Rules
- Cost Ceilings: These contracts establish an estimate of total cost for obligating funds; contractors cannot exceed this ceiling (except at their own risk) without Contracting Officer approval.
- Usage Criteria: May only be used when requirements are not sufficiently defined or performance uncertainties are too high to permit the use of a fixed-price contract.
- Mandatory Approvals: The rationale for using this contract type must be documented in a written acquisition plan and signed by at least one level above the Contracting Officer.
- Accounting System Requirement: A contract may only be awarded if the contractor’s accounting system is determined to be adequate for tracking and determining costs.
- Government Oversight: The Government must have adequate resources available to manage the contract and provide surveillance to ensure the contractor is using efficient methods and effective cost controls.
- Commercial Prohibition: The use of cost-reimbursement contracts is strictly prohibited for the acquisition of commercial products and commercial services.
Practical Implications
- Contractors must be prepared for rigorous Government oversight and must undergo an accounting system audit (typically by DCAA) to verify they can accurately segregate and report costs.
- Because the Government assumes the risk of cost overruns, agencies must demonstrate they have the specialized personnel (such as CORs and auditors) necessary to provide "reasonable assurance" of the contractor’s efficiency.