Cost Plus Award Fee: Everything You Need to Know
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. 3 min read
2. Cost Plus Incentive Fee
3. Cost Plus Award Fee
4. Cost Plus Award Fee vs. Incentive Fee
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.
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.
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