procurement guide - cost reimbursable (prime cost)
The contractor is appointed, possibly in competition, but on many occasions by negotiation, to carry out the works on the basis that he is paid his actual costs. He also receives a fixed fee or percentage for overheads and profit, which if competitive tendering is possible, can form the basis of the tender.
Some practitioners argue that this procurement method can be likened to being on a time and materials basis, or otherwise ‘Daywork’; albeit with modified terms.
- Enables a very early start to be made on site, but at the expense of cost certainty.
- Overall cost control can be difficult because the contractor does not have any great incentive to work efficiently. Although interim assessments can be made, the total cost is not known until the work is largely completed.
- There is often no means to ensure that errors and bad workmanship are borne by the contractor and sub-contracted works, particularly if all works are let on a prime cost ‘style’ basis. It is for this reason that in many cases sub-contract packages are let on a competitive lump sum basis in order to maintain a deal of cost control. Additionally it may be a term of the tender that a reduction in the costs is made to cover such abortive work. Similarly, it is normal to restrict head office staff costs such that a proportion of these are included in the fixed fee; and to agree a schedule of site staff and site establishment costs in order to create some level of cost certainty.
- The risk for unforseen circumstances lies with the client.
Probably a last resort method of procurement in view of the uncertainty of total cost inherent in the process. Really only suitable for projects where an immediate start on site is required, for example where fire damage or terrorist damage has occurred, or perhaps with difficult refurbishments where the scope of work cannot be established until the work progresses.