In what situation is it essential for a purchaser to monitor costs closely?

Monitoring costs closely is particularly essential under cost-reimbursement contracts because these types of contracts involve reimbursements to the contractor for their allowable costs incurred while performing the contract. Unlike fixed-price contracts, where the price is set and the contractor bears the risk of cost overruns, a cost-reimbursement arrangement requires the purchaser to keep a vigilant eye on costs to ensure that they are reasonable, allowable, and allocable as stipulated in the contract terms.

In this scenario, the purchaser must ensure that the contractor is not charging for any unallowable or excessive costs, since the government or client will be accountable for reimbursing these expenses. Additionally, since the total cost can fluctuate based on the actual expenses incurred, careful monitoring is necessary to maintain budget control and prevent financial overruns, ensuring that reimbursements align with the contract's stipulations.

In contrast, fixed-price contracts place the financial risk on the contractor, unit price contracts focus on the agreed price per unit of work, and long-term service contracts may have fixed rates or a defined scope which can reduce the immediate need for vigilant cost monitoring compared to the nature of cost-reimbursement agreements. Hence, the inherent risk and financial dynamic in cost-reimbursement contracts highlight the critical need for careful cost oversight by the purchaser.