2 PRIME COST OR REIMBURSABLE CONTRACTS IN A PRIME COST, OR REIMBURSA...

In a prime cost, or reimbursable, contract there is no price at all stated in the

contract. Instead, the contractor is reimbursed the expenditure he actually

incurs on materials, plant and labour and gets a further sum to cover his over-

heads and profit. This further sum can be a percentage of the costs incurred or a

fixed fee. The employer in this kind of contract obviously runs a substantial risk

of incurring higher than budgeted project costs; the main advantage or trade-off

from his point of view is that the contractor can start work without delay.

In practice, therefore, the employer will only enter into a reimbursable con-

tract where the time available is so short, but the profit potential so great, that

the financial risk is worth taking. From the contractor ’ s point of view, there is

no risk of underpricing at the outset but there is a risk that the project could

become unprofitable for him if, perhaps for reasons beyond the contractor ’ s

control, it continues for too long or involves diverting resources from other,

more profitable projects.