A cost-plus-incentive fee (CPIF) contract is a cost-reimbursement

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

which provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs.

Federal Acquisition Regulations The Federal Acquisition Regulation (FAR) is the principal set of rules regarding Government procurement in the United States. The document describes the procedures executive branch agencies use for acquiring products and services. FAR is part o ...

16.3—Cost-Reimbursement Contracts
Like a

cost-plus contract A cost-plus contract, also termed a cost plus contract, is a contract such that a contractor is paid for all of its allowed expenses, ''plus'' an additional payment to allow for risk and incentive sharing.profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...

decreases when exceeding the target cost. Similarly, the seller's profit increases when actual costs are below the target cost defined in the contract. According to the

PMBOK The Project Management Body of Knowledge (PMBOK) is a set of standard terminology and guidelines (a body of knowledge) for project management. The body of knowledge evolves over time and is presented in ''A Guide to the Project Management Body o ...

(7th edition) by the

Project Management Institute The Project Management Institute (PMI, legally Project Management Institute, Inc.) is a U.S.-based not-for-profit professional organization for project management. Overview PMI serves more than five million professionals including over 680,0 ...

(PMI), CPIF is a "type of cost-reimbursable contract where the buyer reimburses the seller for the seller's allowable cost (allowable costs are defined by the contract), and the seller earns its profit if it meets defined performance criteria".

Formula and Examples

Incentive contracts allow sharing of the risks between the contractor and the client. The contractor is reimbursed all its justifiable costs in addition to a calculated fee. The basic elements of a CPIF contract are: :*Target Cost: the estimated total contract costs. :*Actual Cost: constitutes the reasonable costs that the contractor can prove have been incurred. :*Target Fee: the basic fee to be paid if the Target Cost matches the Actual Cost (target profit). The Target Fee varies between the Minimum Fee and the Maximum Fee according to a formula tied to the Actual Cost (e.g. Target Fee could be 10% of the Actual Cost). :*Sharing Ratio: the agreed upon cost sharing proportion, normally expressed in percentage (e.g. 85% for the client / 15% for the contractor). It is often different for cost overruns and cost underruns. Other components of incentive fee contracting include: :*Maximum Fee: the highest fee that may be earned, usually expressed as a percentage. :*Minimum Fee: the lowest fee that may be earned, usually expressed as a percentage. The Final Fee (profit of the contractor) is expressed as follows: Final Fee = Target Fee + (Target Cost - Actual Cost) * Contractor Share. The Final Price of the contract is expressed as follows: Final Price = Actual Cost + Final Fee. Note that if Contractor Share = 1, the contract is a Fixed Price Contract; if Contractor Share = 0, the contract is a cost plus fixed fee (CPFF) contract.Stephen Ward, Chris Chapman
Choosing contractor payment terms
''International Journal of Project Management'', Volume 12, Issue 4, November 1994, Pages 216-221, , For example, assume a CPIF with: :*Target Cost = 1,000 :*Target Fee = 100 :*Benefit/Cost Sharing Ratio for cost overruns = 80% Client / 20% Contractor :*Benefit/Cost Sharing Ratio for cost underruns = 60% Client / 40% Contractor If the Actual Cost is higher than the Target Cost, say 1,100, the client will pay: 1,100 + 100 + (1,000 - 1,100) * 0.2 = 1,180 (contractor earns 80). If the Actual Cost is lower than the Target Cost, say 900, the client will pay: 900 + 100 + (1,000 - 900) * 0.4 = 1,040 (contractor earns 140).

Notes

References

Sources

* {{DEFAULTSORT:Cost-Plus-Incentive Fee Contract law Procurement