A cost-plus-incentive fee (CPIF) contract is a cost-reimbursement contract that provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs.
Like a cost-plus contract, the price paid by the buyer to the seller changes in relation to costs, in order to reduce the risks assumed by the contractor (seller). Unlike a cost-plus contract, the cost in excess of the target cost is only partially paid according to a Buyer/Seller ratio, so the seller's profit decreases when exceeding the target cost. Similarly, the seller's profit increases when actual costs are below the target cost defined in the contract.
Formula and Examples
Incentive contracts allow sharing of the risks between the contractor and the client. The contractor is reimbursed all its justifiable costs in addition to a calculated fee. The basic elements of a CPIF contract are:
Other components of incentive fee contracting include:
The Final Fee (profit of the contractor) is expressed as follows: Final Fee = Target Fee + (Target Cost - Actual Cost) * Contractor Share
The Final Price of the contract is expressed as follows: Final Price = Actual Cost + Final Fee
Note that if Contractor Share = 1, the contract is a Fixed Price Contract; if Contractor Share = 0, the contract is a cost plus fixed fee (CPFF) contract.
For example, assume a CPIF with:
If the Actual Cost is higher than the Target Cost, say 1,100, the client will pay: 1,100 + 100 + (1,000 - 1,100) * 0.2 = 1,180 (contractor earns 80).
If the Actual Cost is lower than the Target Cost, say 900, the client will pay: 900 + 100 + (1,000 - 900) * 0.4 = 1,040 (contractor earns 140).