Cost Plus Fixed Fee Contract: Everything You Need to Know
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.3 min read
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.
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:
- Cost reimbursement
- Cost plus
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:
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.
Completion and Term Forms
Cost plus fixed fee contracts can come in a couple of different forms:
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.
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