Prime cost and cost reimbursable construction contracts
Prime cost and cost reimbursable construction contracts

The following Construction practice note provides comprehensive and up to date legal information covering:

  • Prime cost and cost reimbursable construction contracts
  • What is a prime cost contract?
  • Why might an employer enter into a prime cost arrangement?
  • What are the potential disadvantages for the employer in using a prime cost contract?
  • Uncertainty over cost
  • Potential inefficiency
  • Unfamiliarity
  • What are the potential disadvantages for the contractor in using a prime cost contract?
  • What are the alternatives to prime cost?
  • Split contracts
  • More...

What is a prime cost contract?

In simple terms, if a contract is agreed on a ‘prime cost’ basis the contractor will be reimbursed the costs it incurs in carrying out the works, ie labour and materials (including those from sub-contractors), plus a management fee on top to cover its overheads and profit. This is distinct from a typical contract agreed on a lump sum basis, where the employer and contractor agree the total contract sum payable to the contractor at the outset (subject to any contractual provisions that allow the sum to change as the works progress) and the risk of any increase in the cost of the works sits with the contractor.

Management contracting is an example of where prime costs are commonly used. The management contractor is paid a fee for the services it carries out together with the prime costs it incurs in carrying out its functions. These costs include the amount it pays to the works contractors for the works they carry out. See Practice Note: Management contracting.

A prime cost arrangement is generally thought of as the same as a ‘cost plus’ or ‘cost reimbursable’ contract, although some sources argue that there is a subtle distinction between these types due to the allocation of risk to the contractor in some forms of contract. This Practice Note uses the term ‘prime cost’.

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