Reimbursement of costs incurred: Overview, definition, and example
What is reimbursement of costs incurred?
Reimbursement of costs incurred refers to the process where one party (often an employer, client, or business partner) repays another party for the expenses they have paid out-of-pocket while fulfilling a contractual obligation or business requirement. These costs could include travel expenses, office supplies, legal fees, or other out-of-pocket costs related to the completion of a project or the execution of a contract. The reimbursement is typically made once the expenses have been documented and verified.
For example, an employee might incur travel expenses while attending a work-related conference, and the employer would reimburse the employee for these costs upon submission of receipts.
Why is reimbursement of costs incurred important?
Reimbursement of costs incurred is important because it ensures that the party who has spent money on behalf of another is fairly compensated. It helps avoid financial burden on the individual or organization that initially covered the costs. For businesses, it provides clarity in managing expenses and ensures that budgets are followed. For employees or contractors, it guarantees they will be reimbursed for expenses that are necessary to perform their work or services.
Reimbursement clauses are often included in contracts to specify the type of expenses that are eligible for reimbursement, the process for claiming them, and the timeline for payment.
Understanding reimbursement of costs incurred through an example
Imagine a project manager is working for a company on a client project. The manager has to travel to another city for a meeting and incurs travel costs such as airfare, meals, and hotel stays. As per the terms of their contract, the company agrees to reimburse the manager for these expenses. The manager submits receipts for the travel costs, and the company reimburses the manager according to the contract’s reimbursement clause.
In another example, a business consultant hires a subcontractor to assist with a project. The consultant agrees to cover the subcontractor’s expenses for materials and travel. After the work is completed, the subcontractor submits an invoice detailing the expenses incurred, and the consultant reimburses the costs as agreed upon in the contract.
An example of a reimbursement of costs incurred clause
Here’s how a clause like this might appear in a contract:
“The Company agrees to reimburse the Contractor for all reasonable costs incurred in the performance of services under this Agreement, including travel, materials, and other pre-approved expenses, provided that the Contractor submits detailed receipts or documentation for such expenses within [X] days of incurring them.”
Conclusion
Reimbursement of costs incurred ensures that the party who initially pays for necessary expenses is compensated by the responsible party. It helps maintain fairness in business transactions and ensures that the party incurring the costs is not left financially burdened. By having clear terms on reimbursement in contracts, businesses and individuals can better manage costs and avoid misunderstandings.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.