Key Takeaways

  • A cost plus award fee (CPAF) contract reimburses the contractor’s costs and provides an additional award based on performance quality, as judged against criteria in the contract.
  • Unlike incentive fee contracts, the award is determined subjectively and is generally not open to appeal.
  • CPAF contracts are often used when performance objectives can’t be fully quantified in advance, such as in complex government projects.
  • Key benefits include encouraging high-quality work, fostering better communication, and improving buyer–seller relationships.
  • Award fee determinations are made periodically, often in multiple evaluation periods, and can be adjusted based on evolving performance.

Cost plus award fee is a type of contract agreement that offers a performance award to the contractor. The contractor earns this award for excellence in various areas of work, such as:

  • Technical skill.
  • Adherence to a schedule.
  • Keeping costs low.

Several types of contract agreements are used in project management. These influence the decisions made during the planning process. The cost-plus contract, also called the cost reimbursement contract, is one of the most-used types. This contract makes sure sellers get reimbursed for the costs they incur when completing their work.

Different types of work are best rewarded with different award structures. The best contract type to use also depends on the employer. For example, a government contractor might do business much differently than a private company or an individual. It is not always possible to predetermine the objective targets related to the performance evaluation before work begins.

Cost reimbursement contracts allow the buyer to offer incentives based on achieving certain objectives. They are also useful when you can't clearly predict the work involved at the outset of the project. Three most common types of these contracts include:

  • Cost plus fixed fee
  • Cost plus incentive fee
  • Cost plus award fee

Cost Plus Fixed Fee

Cost plus fixed fee (CPFF) contracts reimburse the seller for the costs involved in performing the work and adds a predetermined fee on top of that. This fee is a percentage of the project's estimated costs. If the project scope changes, the fee amount might change, as well.

Cost Plus Incentive Fee

In a cost plus incentive fee (CPIF) contract, the seller gets reimbursed for the costs involved in performing the work. He or she will also receive a fee based on meeting the work's established objectives, also called an incentive. Typically, if the project's final cost is less than the amount originally estimated, the seller receives a reward.

Alternatively, if the final cost is more than originally estimated, the seller's incentive fee will be lower. The buyer and seller typically split the difference between the estimated cost of the work according to set calculation, such as 80 percent for the buyer and 20 percent for the seller. The seller might also receive a bonus for completing the work early, ahead of the estimated schedule.

Cost Plus Award Fee 

The cost plus award fee (CPAF) is a contract that allows the seller to be reimbursed for the costs of performing the work and earn an additional amount for excellent performance. The amount of this fee is determined by an evaluation according to criteria stated in the contract, and it is generally nonnegotiable. If the performance is unsatisfactory, the buyer will not be paid that fee.

Governmental agencies, such as the Department of Defense, most commonly used this type of contract. Its benefits include:

  • Providing an incentive for the contractor to provide better service.
  • Providing an incentive for the contractor to create better products.
  • A better relationship between the seller and buyer, or client, because good performance will be rewarded.
  • Better communication between the contractor and the buyer, because the reward is directly related to both performance and accurate evaluation of that performance. 

Although there might be additional costs involved with this type of contract, many believe the potential for quality improvement is worth it.

When to Use a Cost Plus Award Fee Contract

CPAF contracts are most effective when:

  • Requirements Are Complex or Evolving: Projects where exact performance objectives cannot be set in advance benefit from a flexible, qualitative evaluation approach.
  • Quality Is a Critical Factor: The contract allows the buyer to emphasize performance aspects such as innovation, risk management, and responsiveness.
  • Frequent Feedback Is Beneficial: Regular evaluations encourage continuous improvement and close collaboration between buyer and contractor.
  • Cost Risk Is Acceptable: Since the buyer reimburses actual costs, this contract type is better suited for situations where cost uncertainty is tolerable.

They are less suitable when performance can be objectively measured or when budget constraints require firm cost commitments.

Award Fee Determination and Structure

In a cost plus award fee (CPAF) contract, the award fee is determined through a formal evaluation process that is outlined in the contract. Typically:

  • Evaluation Periods: Contracts specify periodic reviews (e.g., quarterly, semiannually) to assess contractor performance.
  • Award Fee Plan: The contract often includes an award fee plan detailing performance criteria, scoring methodology, and evaluation schedules.
  • Award Fee Board or Panel: For government contracts, an Award Fee Board may be convened to review performance data and recommend an award amount to the contracting officer.
  • Subjective Criteria: Assessments may focus on areas like technical excellence, management effectiveness, schedule adherence, and cost control—factors that are not always easily quantified.
  • No Guaranteed Award: Even if all costs are reimbursed, poor performance can result in no award fee being paid for that period.

This structure allows flexibility in rewarding exceptional performance while retaining the right to withhold awards if expectations are not met.

Cost Plus Award Fee vs. Incentive Fee

Cost plus award fee and cost plus incentive fee contracts are set up similarly. Both contract forms allow the seller to be reimbursed for all costs incurred while completing the work. They both also offer an additional fee on top of that. This additional fee provides their profit for doing the work. There are, however, differences between the two contracts.

In the cost plus award fee contract, the evaluation of the seller's performance is subjective and determined on a case-by-case basis. Despite this, the amount is final and usually not open to appeal or negotiation.

In the cost plus incentive fee contract, the fee amount is determined by evaluating the seller's performance using predetermined performance objectives, which are specifically outlined in the contract. This allows for consistency and fairness.

Key Differences in Award Administration

While both CPAF and cost plus incentive fee (CPIF) contracts add a performance-based payment to reimbursed costs, their administration differs:

  • Evaluation Method:
    • CPAF: Subjective evaluations based on qualitative criteria.
    • CPIF: Objective calculations based on predetermined cost, schedule, or technical targets.
  • Flexibility:
    • CPAF: Can adjust criteria or weightings during the contract if agreed upon.
    • CPIF: Targets and formulas are fixed once the contract is awarded.
  • Risk and Motivation:
    • CPAF: Places more emphasis on motivating exceptional performance beyond minimum requirements.
    • CPIF: Focuses on meeting quantifiable metrics to share cost savings or penalties.

Understanding these distinctions helps buyers choose the structure that best aligns with their project’s performance monitoring capabilities and goals.

Frequently Asked Questions

  1. What is the main advantage of a cost plus award fee contract?
    It encourages high-quality performance in areas that are difficult to measure objectively, such as innovation and responsiveness, while reimbursing costs.
  2. How often is the award fee evaluated?
    Typically quarterly or semiannually, as specified in the contract’s award fee plan.
  3. Can the contractor appeal an award fee determination?
    Generally, no. The award decision is at the sole discretion of the contracting officer or designated authority and is not subject to negotiation.
  4. Are CPAF contracts only used by the government?
    While common in federal procurement, they can also be used in private sector projects requiring flexible performance evaluation.
  5. What happens if performance is poor?
    The contractor may be reimbursed for costs but receive no award fee for the evaluation period in which performance was unsatisfactory.

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