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Day Rate, Cost Plus and Charter Contracts

Day rate, Cost plus and Charter contracts each have specific applications that determine how the contractor is paid and who is managing the project.

Day rate contract

Day rate contract is the price or cost of a particular service for a day's period. In some markets it is referred to as "per diem" (cost that an organization will pay for one days' work). It often translates to a 7.5 or 8 hour work day. Some purchasing organizations prefer a quoted day rate instead of an hourly rate for services. A Day rate contract would usually incorporate a Scope of Work. The employer and the contractors usually agree on a flat fee per contract, so the day rate is determined by dividing the total amount by the number of days in the contract. In a day rate contract the contractor generally is free to choose how to work.

Cost plus contract

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Although less commonly used in dredging, in a cost-plus contract, also called a cost reimbursement contract, the client agrees to reimburse a contractor for expenses stated in the contract plus an additional amount to allow for profit and overhead, usually stated as a percentage of the contract’s full price.  The main purpose of a cost plus contract is to allow the client great flexibility through direct supervision and the ability to adjust quickly to unforeseen circumstances.  It gives the client the greatest opportunity to save money if risks do not materialise. To protect against cost overruns, many contracts state the reimbursement cannot exceed a specific amount. The cost-plus contract pays the contractor for direct and indirect costs, with all expenses being supported by documentation of the contractor’s spending. Although not often the case, cost plus contracts can be the subject of tender procedures. Examples of this situation are:
  • when certain costs are subject to limits or
  • when exceeding certain agreed milestones triggers limitations to the payment of all costs incurred by the contractor.
All expenses must be supported by documentation of the contractor’s spending and the responsibility resides with the contractor to verify these costs.

Charter contract

Charter Party Agreements are widely used in the shipping industry where vessels are hired for voyages to transship commodities. It is a standard contract used in the shipping industry and the standard charter agreements are published by BIMCO (The Baltic and International Maritime Council) registered in Denmark. These are used internationally. Charter contracts are used as well in the dredging industry to hire vessels, either on a bare boat basis (i.e. for the equipment alone) or on a time charter basis (with a crew).  The equipment must meet the standard of the charter and perform as required by the charter but the charter will not warrant performance of a fixed scope of work within a period for completion.  The IADC also provides a standard form charter suitable for dredging work.