Key Takeaways

  • Cost plus fixed fee contracts (CPFF) provide contractors reimbursement for allowable expenses plus a fixed fee.
  • The fixed fee is negotiated upfront and does not vary with actual project cost unless the scope changes.
  • CPFF contracts come in two forms: completion and term.
  • They are governed by FAR regulations and require specific justification for use.
  • These contracts can be beneficial for both parties in research or uncertain project environments, though they may limit cost-efficiency incentives.
  • Alternate contract types may be more suitable depending on the level of risk and project scope.

A cost plus fixed fee contract is a specific contract type that offers a set incentive for the contractor upon the job completion. It is important to note that the incentive fee is fixed and cannot be changed under normal circumstances.

Cost Plus Fixed Fee Contracts

Cost plus fixed fee contracts are a specific contract type that make sure a contractor receives the following:  

  • Regular expenses associated with a job
  • A fixed incentive fee upon job completion

Contracts of this nature help to:

  • Make sure contractors are undertaking profitable jobs.
  • Encourage more economic project management in a number of industries. 

In other words, a cost plus fixed fee contract provides a set fee. It is agreed upon during the contract's negotiation phase. This is on top of the cost of completing a project. Incentive fees are fixed; this means they do not increase nor decrease in relation to the actual cost of a project. 

If the scope of the job should change, there may be provisions that allow for adjustments to be made to this fee.

When Are Cost Plus Fixed Fee Contracts Used?

Cost plus fixed fee contracts are typically used in situations where precise project costs are difficult to determine in advance. This is especially common in research and development (R&D) projects, where innovation and exploration make cost estimation challenging. These contracts are favored by government agencies and regulated under the Federal Acquisition Regulation (FAR), particularly FAR 16.306. A CPFF contract is appropriate when:

  • The work scope is complex or high risk.
  • The contractor may not agree to assume full cost responsibility.
  • The contracting agency needs flexibility in changing requirements.
  • There's a legitimate expectation of mutual benefit despite cost uncertainty.

However, CPFF contracts are not permitted unless the contractor’s accounting system can accurately track costs, and the contracting officer determines that other contract types are not feasible.

Calculating Expenses for Cost Plus Fixed Fee Contracts

In most cases, the expenses for a job will be calculated by comparing current market values. The incentive fee, however, can be specifically negotiated between the client and the contractor. This means while incentive fees are fixed and cannot be changed once agreed upon, they may vary depending on the specific requirements of each individual job.

Cost plus fixed fee contracts are also sometimes called:  

  • CPFF
  • Cost reimbursement
  • Cost plus

Contract Structure and Fee Adjustments

In a CPFF contract, the total payment to the contractor includes:

  1. Reimbursable Costs – Direct and indirect costs necessary for contract performance, such as labor, materials, and overhead.
  2. Fixed Fee – A pre-negotiated fee that does not change with the actual cost incurred.

Although the fee itself is fixed, it can be adjusted if the contract scope is modified. According to FAR 16.306(a), this ensures fairness in situations where the nature or volume of work changes after the initial agreement.

Who Benefits from Cost Plus Fixed Fee Contracts?

Contracts of this nature are generally more beneficial to the client than they are to the contractor, given that they place a cap on the incentive fee that contractors can claim. That fee will usually not increase or decrease should the operational budget fluctuate in one direction or the other. However, this type of contract can protect the contractor should the project's budget decrease by making sure he or she will still make the same amount of money on the job. 

A cost plus fixed fee contract can also encourage contractors to undertake certain jobs that might otherwise be considered too risky for them. This is because they are guaranteed to receive a set fee for their work. However, this also doesn't give contractors much reason to control the cost of a project. 

Cost plus fixed fee contracts cannot be awarded unless the contracting officer meets all requirements outlined in:  

  • 15.404-4(c)(4)(i)  
  • 16.301-3

Advantages and Disadvantages of CPFF Contracts

Advantages:

  • Encourages contractor participation in high-risk or uncertain projects.
  • Provides payment security through a fixed fee regardless of project overruns.
  • Reduces pressure on contractors to underbid or cut corners.

Disadvantages:

  • Minimal incentive for cost control, since fee is fixed.
  • Requires strong accounting practices and government oversight.
  • May be less suitable for well-defined projects with predictable costs.

Government entities often choose CPFF to balance risk while ensuring project delivery, especially when the contractor's innovation is central to the project outcome.

Other Type of Contracts

A cost plus fixed price contract may not always be the best choice for every situation. It is important to consider the pros and cons of each available contract type, including:

  • Fixed price
  • Firm fixed price
  • Fixed price incentive fee
  • Fixed price, or "lump sum"
  • Fixed price with economic price adjustment

Fixed price contracts, as their name suggests, provide contractors with a single, set fee. Contracts of this nature do not allow for changes in price under most circumstances. Therefore, contracts like this are of the greatest risk for contractors to sign. 

Fixed price incentive fee contracts are highly favored by contractors and clients alike. This type of contract offers contractors with additional profit potential by increasing the incentive amount when a project is managed well. 

Fixed price contracts, otherwise known as "lump sum" contracts, are the simplest and most straightforward contracts. They simply involve a set price that is agreed upon by all the involved parties before the work commences. Lump sum contracts are among the most commonly used in many industries. A fixed price with economic price adjustment contract allows for increases and decreases to be made in a contractor's incentive fee when certain economic conditions arise.

Comparison with Other Cost-Reimbursement Contracts

Cost plus fixed fee contracts are just one subtype of cost-reimbursement contracts. Others include:

  • Cost Plus Incentive Fee (CPIF): Adds a variable incentive based on cost savings or performance.
  • Cost Plus Award Fee (CPAF): Includes subjective performance-based fees awarded at the agency’s discretion.

Unlike CPFF, CPIF and CPAF contracts offer greater incentive for cost-efficiency and performance, but they involve more complex evaluation criteria.

Completion and Term Forms

Cost plus fixed fee contracts can come in a couple of different forms:  

  • Completion  
  • Term

A completion contract specifically states the following:  

  • Goals and targets  
  • Expected end product

The completion form of a cost plus fixed fee contract usually requires the contractor to deliver the expected product within the target cost to receive payment of his or her entire incentive fee, if at all possible.

Frequently Asked Questions

1. What is a cost plus fixed fee contract?It is a type of cost-reimbursement contract where the contractor is paid for allowable costs plus a negotiated fixed fee that does not change with actual project cost.

2. When are CPFF contracts typically used?They are used in research, development, or other uncertain projects where precise cost estimation is not feasible.

3. Can the fixed fee in a CPFF contract ever change?Yes, but only if the scope of work is modified through a formal contract adjustment.

4. Are CPFF contracts subject to FAR regulations?Yes, they are governed by FAR 16.306 and can only be used under specific conditions.

5. What’s the difference between CPFF and CPIF contracts?CPFF includes a fixed fee, while CPIF includes a variable fee based on performance or cost savings.

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