Cost Plus Contracts

Cost Plus Contracts

Cost Plus Contracts (Cost Plus Fixed Fee, Cost Plus Incentive Fee, Cost Plus Award Fee) is the 35th post in our PMP Concepts Learning Series.

Designed to help those that are preparing to take the PMP or CAPM Certification Exam, each post within this series presents a comparison of common concepts that appear on the PMP and CAPM exams.

Cost Plus Contracts

Cost-reimbursable (or cost-plus) contracts involve payment to the seller for seller’s actual costs, plus a fee typically representing seller profit. Cost-reimbursable contracts place more risk on the buyer.

Three common types: cost plus fixed fee (CPFF), cost plus incentive fee (CPIF), and cost plus award fee (CPAF)

Cost Plus Fixed Fee (CPFF)

In a CPFF contract the seller is reimbursed for allowable costs for performing the work and also receives a fixed fee payment that is calculated as a percentage of the initial estimated project costs. The fee amount would only change if there was a change to the project scope.

Contract value = actual costs + fixed fee

Cost Plus Incentive Fee (CPIF)

In a CPIF contract the seller is reimbursed for allowable costs and the seller receives an incentive fee based on achieving certain performance objectives.

If the final costs are less or greater than the original estimated costs, then both the buyer and seller share costs based upon a pre-negotiated formula (such as 70/30). Generally the first number in the split refers to the buyer’s portion, the second number to the seller’s portion.

Contract value = actual costs ± percentage of difference + incentive fee

Cost Plus Award Fee (CPAF)

In a CPAF contract the seller is reimbursed for allowable costs. The majority of the fee is only earned based on the satisfaction of identified broad subjective performance criteria. The performance criteria is defined and included in the contract and the fee determination is based solely on the determination of seller performance by the buyer and is usually not subject to appeals.

Contract value = actual costs + buyer-defined performance fee

Examples

CPFF:

The contract states that the builder will be reimbursed for the costs associated with the construction of the shed, estimated at $10,000. In addition, the builder will receive a fixed fee equal to 50% of the estimated costs ($10,000 x 50% = $5,000)

If the final costs are $18,000, the builder will receive:

$18,000 Cost (100% of actual costs)
$5,000 Fixed Fee (50% of the $10,000 estimate)
$23,000 Total

CPIF:

The contract states that the artist will have all costs reimbursed for the new sign, estimated at $5,000 and in addition, for each day that the sign is completed early, the artist will receive $200. If final costs are higher or lower than $5,000, the difference will be split 50/50.

If the final costs are $6,000 and the artist delivers the sign three days early, the artist will receive:

$5,000 Cost (100% of estimated costs)
$500 Cost (50/50 split of the $1000 over the estimate)
$600 Incentive Fee ($200 x 3 days early)
$6,100 Total

CPAF:

The contract states that the performer will be reimbursed for their costs and in addition will receive an award fee based on the reaction of the audience.

If the final costs are $10,000, anything above the $10,000 would be paid at the discretion of the buyer.

See all posts in our PMP Concepts Learning Series

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