What is Cost Reimbursement?

Malcolm Tatum

Cost reimbursement is a term used to describe the settling of expenses that are accrued during the process of working on a project. Depending on the terms of the agreement between all parties involved in the project, this type of reimbursement may take place if the project is ever completed or even if the project ultimately does not generate the anticipated returns. There are several different examples or types of cost reimbursement, including the contractor reimbursement. In addition, different pricing methods like the constant pricing method may be used in calculating the amount of a given reimbursement.

Businessman with a briefcase
Businessman with a briefcase

The basic function of cost reimbursement is to repay contractors for any expenses they incur while performing tasks or fulfilling commitments that are associated with a specific project. One of the most common approaches to the reimbursement process is known as the cost-plus method. In this scenario, the reimbursement is intended to not only defray the costs incurred by the contractor, but also allow a reasonably amount of additional compensation for the time spent working on the project. A model of this type is often used in construction projects, but may also apply in outsourcing situations in which a contractor agrees to perform certain services on behalf of a client.

At other times, the approach to cost reimbursement is focused on covering actual costs. Here, the contractor may be required to submit documentation to confirm the line items identified in the reimbursement request, much in the same manner that an employee submits receipts when filing an expense report with an employer. The documentation and the amounts on the request are cross-referenced with the terms and conditions found in the contract between the two parties involved. Assuming that the expenses are in harmony with the provisions of the contract, the reimbursement is issued to the contractor.

With all types of cost reimbursement, the need to keep accurate records of all expenses is essential. Doing so makes it much easier to prove that a given expense is actually associated with a function assigned to the contractor, and that the amount of the expense is within the terms of the agreement that governs the working relationship. It is important to note that provisions for reimbursement are often drafted to be in accordance with governmental laws and regulations, meaning that the reimbursement may be upon demand or may be scheduled for payment using guidelines found in the text of the contract.

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