What is involved in a “Cost-Reimbursement Contract” under FAR?

A cost-reimbursement contract under FAR is characterized by the government reimbursing the contractor for allowable costs incurred during the performance of the contract. This type of contract is used when the scope of work cannot be precisely defined at the outset, making it difficult to estimate costs accurately. Because of this flexibility, contractors are compensated for the total of their incurred costs that are allowable under the terms of the contract.

In this type of contract, the government assumes a greater share of the risk compared to fixed-price contracts, as it pays for costs as they are incurred rather than at a fixed price. This arrangement can facilitate projects that may require extensive research, development, or any situation where the outcome cannot be precisely foreseen.

Other choices focus on aspects that do not align with the fundamental principles of a cost-reimbursement contract. While pre-approved budgets might be a component of specific contracts, they are not a requirement for all cost-reimbursement contracts. Additionally, guaranteeing profit margins tied to performance is more characteristic of incentive contracts, whereas stating that all costs are borne by the contractor until project completion does not hold true given the nature of these contracts, where the government covers allowable costs as they arise.