Key Takeaways

  • A fee contract, often called a cost-plus contract, reimburses contractors for job-related costs plus a fee.
  • These contracts protect contractors by covering expenses and offering potential profits through fixed fees or performance bonuses.
  • Clauses like maximum reimbursement limits and savings incentives are common to control spending.
  • Variants include CPFF (Cost-Plus-Fixed-Fee), CPIF (Cost-Plus-Incentive-Fee), and CPAF (Cost-Plus-Award-Fee) contracts.
  • CPFF contracts guarantee a fixed fee regardless of total costs, while CPIF and CPAF provide performance-based financial incentives.
  • Government contracting rules for cost and fee contracts are detailed under FAR Part 16 and are strictly regulated.

A cost and fee contract is a type of cost-reimbursement contract. It is typically referred to as a cost-plus contract. This type of contract outlines how a contractor is to be paid for the construction expenses that are incurred while performing a job. In many instances, a cost-plus contract will set a limit on how much the contractor can spend for expenses. It is important to have this type of contract for numerous reasons.

How Do Cost and Fee Contracts Protect Contractors?

First, it helps protect the contractor to ensure he will be paid not only for performing the job but for the expenses that are incurred while completing the project. This type of contract has the potential to boost profits for contractors and they became very controversial during the Iraq War. By minimizing costs, this allows contractors to put more money back into their pocket.

For example, if a contractor signs a cost-plus contract in the amount of $50,000 plus $25,000 for expenses, the contractor can minimize his expenses yet say he used the full $25,000. This allows him to increase his profit potential.

A contractor will always lean toward a cost-plus contract because it helps ensure that all project-related expenses will be covered. It is important, however, to keep in mind that the contractor will have to provide proof, such as receipts, to show how the expense money was spent. Plus, there is always the possibility that some of the claimed expenses could be denied. The more proof a contractor has to show how the expense related to the job, the more likely he is to be fully reimbursed.

Do Cost and Fee Contracts Include Clauses?

Most cost and fee contracts will have a section that outlines certain clauses. Generally, the contract will likely outline the maximum amount of money that is guaranteed to be reimbursed. The number will indicate to the contractor that he has only a certain amount of money that can be spent on expenses. This part of the contract is especially important because it allows a contractor to determine if he can actually perform the job according to the allowed expense amount.

Let's say a contractor is given a maximum expense cost amount of $15,000, but he knows that it will take at least $20,000 for him to perform the job according to high-quality standards. In this type of instance, he could try to renegotiate the maximum cost amount, or he can decide not to bid on the job.

A lot of the time, there will be a savings clause, which is an incentive for the contractor to save as much money as possible on the job. For example, if a project has a maximum expense cost amount of $15,000 and the contractor is given a 20% commission for completing the job under this amount. If he ends up completing the job and only uses $8,000 of the maximum cost amount, then he will receive a 20% commission on the $7,000 that was saved. This is a commission bonus of $1,400.

What Is a CPFF?

A cost-plus-fixed-fee contract is commonly referred to as a CPFF contract. This type of contract guarantees the contractor will receive a reimbursement for the expenses as well as a predetermined fee. This amount is agreed upon before the project takes place and is not paid out until the project has been completed. The fee does not change no matter how much the project ends up costing. It's important to note, though, that the fee can change if the scope of the work was to change.

CPFFs come in two different forms:

  • Completion: When a completion contract is created, this means a payout is not given until the entire project is completed. In this type of contract, expenses are still reimbursed even if they exceed the maximum expense cost amount. The fixed fee, however, does not change.
  • Term: The contractor is paid after a specific time period, regardless of whether the project is completed or not. If it's not completed, a new agreement is made and it outlines how much more money the contractor will receive for completing the project in its entirety.

Types of Cost and Fee Contracts

Cost and fee contracts come in several variations, each suited to different project goals and risk-sharing arrangements. Understanding the distinctions helps contractors and clients choose the most appropriate contract type.

  1. Cost-Plus-Fixed-Fee (CPFF):
    Already discussed, this contract reimburses allowable costs and pays a pre-agreed fee, regardless of actual project costs.
  2. Cost-Plus-Incentive-Fee (CPIF):
    This structure offers an incentive fee that increases if the contractor saves money or meets performance goals. A target cost is set, and if the final cost is below it, the contractor shares in the savings, according to a negotiated formula. Conversely, if the cost exceeds the target, the contractor may share in the overrun.
  3. Cost-Plus-Award-Fee (CPAF):
    Common in government contracts, CPAF contracts reward contractors for excellent performance in areas like quality, schedule, and innovation. The fee is awarded based on subjective evaluation and is not guaranteed. This model motivates contractors to exceed baseline expectations.
  4. Cost-Plus-Percentage-of-Cost:
    This type reimburses costs plus a percentage of those costs as the contractor’s fee. However, this format is generally prohibited for federal contracts due to the lack of cost control incentives.

Each type of fee contract has its own benefits and risks. For example, CPIF and CPAF contracts are often favored in federal procurement for their ability to align contractor incentives with project goals.

Government Regulations for Fee Contracts

Fee contracts, especially in federal projects, are governed by strict regulatory frameworks outlined in the Federal Acquisition Regulation (FAR), specifically Part 16. These guidelines dictate when cost-reimbursement contracts may be used and ensure fairness and cost efficiency in public spending.

To use a cost and fee contract under FAR:

  • The contractor’s accounting system must be adequate for determining costs.
  • The contract must specify allowable cost categories.
  • It must include clauses that cap reimbursement and define fee arrangements.
  • For CPAF contracts, an award fee determination plan is typically required to assess performance fairly.

Government agencies often use cost-reimbursement fee contracts when it is not possible to estimate project costs with high confidence. These contracts help ensure project flexibility while protecting the government from excessive costs by capping expenses and rewarding performance instead of simply reimbursing expenditure.

Frequently Asked Questions

1. What is the difference between CPFF, CPIF, and CPAF contracts?CPFF provides a fixed fee regardless of cost. CPIF adds a performance-based incentive, and CPAF awards a bonus based on subjective evaluation.

2. Are cost-plus-percentage-of-cost contracts allowed in federal projects?Generally, no. They are prohibited because they may encourage contractors to increase project costs unnecessarily.

3. Do contractors need to prove expenses in a fee contract?Yes. Contractors must provide receipts and documentation to get reimbursed for project costs.

4. What are typical clauses found in a fee contract?Clauses may include maximum reimbursement caps, savings incentives, required proof of expenses, and performance benchmarks.

5. When are cost and fee contracts most appropriate?They are best used when project scope is uncertain or evolving, such as in research, development, or government services.

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