COST REQUIREMENTS
The purpose of the cost requirements in RFP's is to assure that sufficient cost information is received from suppliers and contractors to evaluate bids, manage the costs of the work performed, and fulfill project accounting requirements.
Simply requesting one price from a supplier or a contractor for the scope of work defined in the RFP.
The cost requirements for engineered materials, equipment, and service contracts are more complex.
The project groups responsible for evaluating the bid proposals for a procurement item provide input to the procurement group on how they want the fixed price from suppliers and contractors broken down in RFP's.
The engineering group may want the bid proposals for an engineered materials contract broken down by the different types of materials defined in the technical specifications.
The licensing group may need to know the cost of certain equipment provided by a supplier to evaluate the cost of meeting a specific government licensing requirement.
Bid evaluations for fixed price contracts consider the costs of revisions and extra work.
Bid evaluations for fixed price contracts with escalation clauses for labor and materials require an assessment of the cost associated with the escalation formulas included in bid proposals for the work.
Certain cost information from fixed price suppliers and contractors is useful to the project groups responsible for managing the work.
The project group responsible for managing the work performed by a fixed price supplier or contractor defines the schedule activities for the contract work that require individual fixed prices.
The accounting group requires cost information from fixed price suppliers and contractors for a number of different purposes.
The accounting group provides these cost requirements to the procurement group for RFP's for fixed price contracts.
The accounting group is responsible for approving and paying invoices submitted by suppliers and contractors.
Unit price contracts often provide more detailed cost information to an owner than is provided by fixed price contracts since it is possible to request unit prices for a number of specific items.
The unit price structure is consistent with the types of materials contained in the technical specifications for a unit price engineered materials contract.
The engineering group also provides input on the unit price structure for construction contracts since it is responsible for the specifications and drawings that define the technical scope of work for construction contracts.
One of the main advantages of unit price contracts is that additions or deletions to the technical documents that define the units of work can be covered by existing unit prices in a contract without requiring a contract change.
The disadvantage of spreading these fixed costs over the unit price items is that any quantity increases automatically add the fixed costs to the unit costs of the added quantities.
The most important element of managing the cost performance of a unit price supplier or contractor is to have a system that adequately defines the quantities of work associated with unit price items that are complete.
Invoices for unit price contracts require more accounting group review than is required for fixed price contract invoices review. Accounting verifies with the project group responsible for managing the unit price contract that the quantities of work on the invoice are correct.
REIMBURSABLE WITH INCENTIVE FEE CONTRACTS
- Set of cost requirements are those that apply to any reimbursable contract.
- Set of cost requirements are those that apply to determining the basis for awarding cost incentive fees.
Bid Evaluation Cost Requirements
The reason that most owners choose to follow a reimbursable contract pricing approach is that the scope of work for a contract cannot be sufficiently defined to support a fixed price approach.
Many engineering contractors charge an overhead percentage on top of their direct costs to cover expenses such as office space and executive support.
RFP's can require that bidders for reimbursable contracts provide estimates of labor hours, equipment usage, and contract cost.
The types of incentive fees that are included in reimbursable contracts are determined by project management and the group responsible for managing the supplier or contractor.
Management Requirements
Reimbursable contracts require extensive cost management programs since the owner is responsible for paying the actual labor and material cost expended by a contractor.
Prior to contract award, the owner is responsible for establishing the budgets for procurement items that are included in a project cost estimate. After contract award, owners often request that reimbursable contractors prepare their own estimates of the cost of their activities to verify that the owner's estimates are reasonable.
To track the actual labor and material costs of the activities that are budgeted for a reimbursable contract, it is necessary to develop cost codes for each budgeted activity.
After cost codes are applied to time sheets for reimbursable contractor work, the accounting group tabulates the hours expended for each cost code.
After the accounting group has tabulated hours and dollars for labor and material cost, the cost control group can issue cost reports.
Cost reports can include hours and costs expended in the preceding week or month as well as total expended hours and costs.
The cost reports described in this section provide management with cost performance information that can be used to control the costs of reimbursable contract work.
If reimbursable contractor is responsible for procuring materials and equipment for a project, the owner monitors the costs of these procurement activities.
Different approaches can be taken to establish cost performance goals that are used in cost incentive fee contracts.
One problem with using total contract costs or hours as the only goal for achieving the cost incentive fees in a contract is that the contract work must be complete before the achievement of the cost incentive fees is determined.
Accounting Requirements
Reimbursable contracts require much greater involvement on the part of the owner's accounting group since the owner approves detailed invoices from the contractors.
Since it can be difficult to verify certain charges on reimbursable contract invoices, it may be necessary to audit a contractor's financial records.
REIMBURSABLE WITH FIXED OR PERCENTAGE FEE CONTRACTS
The bid evaluation and cost management requirements for reimbursable with fixed or percentage fee contracts are not significantly different than those required for reimbursable with incentive fee contracts.
The accounting requirements for reimbursable with fixed or percentage fee contracts are not significantly different than those required for reimbursable with incentive fee contracts.
RESPONSIBILITIES FOR COST REQUIREMENTS
If an owner has a separate cost group on a project, this group recommends cost breakdowns in fixed price contracts. Project management assures that the necessary cost requirements are included in fixed and unit price contracts.
Project management is responsible for determining the type of fee provisions for reimbursable contracts.
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