PAYMENT ARRANGEMENTS

Cost-reimbursable Arrangements

A cost-reimbursable arrangement is often the simplest form of contract,

particularly if the work is ill defined at the outset. This is also called

the ‘‘cost-plus-fee’’ or ‘‘cost-plus’’ contract. It is sometimes referred to as

a ‘‘limit-of-liability’’ contract, because it is normal for the sponsor to set

limits on the amount of funds that he or she is willing to allocate.

Cost-reimbursable Arrangements fixed-price (lump sum) – contractors can bill monthly. If the project is revised, the budget may be revised as well.

stage payment -  in this arrangement, the project

is divided into a series of blocks of work, or ‘‘stages,’’ each with a budget

attached. Usually, Unlike milestones, which are discrete events that occur in sequence, it

is possible for work on several stages to be performed concurrently. If the

stages are relatively large, billing can be done monthly up to some fixed

percentage, as is done in the milestone plan, Beyond that point, billing

is not allowed until the agreed-upon stage is completed.

Claims and Variations

It is the rare project that is completed without changes. Not only are

changes expected, but they are also taken into account by most contracts.

In extreme cases, sponsors have attempted to employ ‘‘all-risk, ceiling

price’’ contracts, which state quite clearly that whatever may transpire on

the project, the contractor is expected to complete the work and the sponsor

will not pay any more than the agreed-upon ceiling price. With more normal contractual arrangements, the cost of work over and above that covered in the contract can normally be recovered in two ways:

claims and variations. A claim is generally a retrospective demand for compensation for costs

properly incurred. Claims can be made whenever additional expenditure

has been incurred for labor or expenses that are not in the agreed-upon

scope of work.

Cost Variation Due to Inflation and Exchange

Rate Fluctuation

Methods to counter currency exchange rate movements include

forward-buying the currency at a fixed exchange rate, and agreements to revalue the contract work at fixed times in the future, based on the prevalent exchange rates at those times.

Price Incentives

Occasionally, situations arise where there is a possibility that cost savings

can be made during the course of the project. This can happen when

uncertainties are so great that it is impossible to agree to a fixed-price

contract without including excessive contingencies. Sponsors naturally

want to avoid this option, and may instead propose a contract that

includes an inducement for the contractor to finish the project at a price

lower than the fixed amount. This inducement is in the form of increased

profit, even though the total contract value may be less, and means

that the customer is sharing a proportion of the cost savings with the

contractor. Inducements can be in the form of a price adjustment formula

that relates to the final profit, or a bonus payable if agreed-upon cost

thresholds are met. Bonuses can also be paid for early completion.

It is normal to fix, at the outset, both the maximum price (the ceiling

price) and the assumed minimum level of profit. Below the ceiling price,

a lower figure is agreed upon as the target price, which contains a

higher level of profits that the contractor feels he or she should be able to

achieve. As the contract proceeds, claims are made in stages, according to

a payment plan and observed progress. Profit at the low level can also be

included in these claims. At the end of the contract, a formula is applied

to the value of the claims, and if the total value is below the ceiling price

an additional payment is made.

Retentions

Despite the fact that work may appear to be completed satisfactorily, there

may be reasons to withhold an amount of money until final settlement

is made with the contractor. This practice is called retention. Usually,

retentions are used to ensure that if any defects are discovered in the

project work, the contractor will properly rectify them.