A cost-plus-incentive fee (CPIF) contract is a cost-reimbursement
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
that 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."Subpart 16.3—Cost-Reimbursement Contracts", U.S.
Federal Acquisition Regulations
The Federal Acquisition Regulation (FAR) is the principal set of rules regarding Government procurement in the United States,. and is codified at Chapter 1 of Title 48 of the Code of Federal Regulations, . It covers many of the contracts issued by ...
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'' additional payment to allow for a profit.Stephen Ward, Chris Chapman, Choosing contractor payment terms, International Journal of Project Management, Volume 12, Issue 4, November 1994, Pages 216-221 ISSN 0263-7863,
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).