How is a "cost-reimbursement contract" structured?

A cost-reimbursement contract is structured in a way that allows the buyer to reimburse the seller for allowable expenses incurred while completing a project. This type of contract is particularly useful when the cost of performance is uncertain, making it challenging to define a fixed price upfront. In this arrangement, the seller is generally obligated to manage costs effectively, but they can submit valid invoices for the actual expenses they incur. Allowable costs typically include direct costs, such as labor and materials, as well as indirect costs specified in the contract.

This arrangement incentivizes the seller to provide quality work, as their costs will be covered as long as they adhere to the terms of the contract regarding allowable expenses. It is common in government contracting or projects requiring research and development, where outcomes are uncertain, and costs may fluctuate.

The other choices present different contract structures or terms that do not apply to a cost-reimbursement contract. In a true cost-reimbursement contract, the risk is shared; the seller has some risk but is protected by the reimbursement mechanism, which distinguishes it from other contract types where the seller may bear more financial responsibility or where payments are tied strictly to project completion or fixed estimates.