HKSM

A contract type in which the buyer reimburses the seller for all allowable, actual costs of the work and adds a discretionary award fee tied to performance, which serves as the seller's profit.

Key Points

• Seller is repaid for allowable actual costs; profit is primarily the performance-based award fee.
• The award fee is subjective, based on the buyer's evaluation against an award-fee plan, and can range from zero to a stated maximum.
• Best for R&D or evolving scope where costs are uncertain and the buyer wants to motivate superior performance and collaboration.
• Cost risk sits mostly with the buyer; profit risk and evaluation uncertainty sit with the seller, and administration overhead is higher.

Example

A government agency hires a vendor to develop a prototype medical device. The contractor is reimbursed for all allowable development costs. Every six months, an award-fee board rates quality, schedule discipline, innovation, and customer satisfaction. Based on those ratings, the buyer pays an additional award fee, which may be anywhere from zero up to the preapproved fee pool.

PMP Example Question

Which contract type reimburses allowable costs and provides a performance-judged award fee rather than a formula-based incentive?

1. Cost Plus Award Fee (CPAF)
2. Cost Plus Incentive Fee (CPIF)
3. Fixed Price Incentive Fee (FPIF)
4. Time and Materials (T&M)

Correct Answer: A — Cost Plus Award Fee (CPAF)

Explanation: CPAF reimburses actual costs and uses a discretionary, subjective award fee for profit. CPIF uses a formula to calculate the incentive fee, FPIF is a fixed-price contract with an incentive, and T&M pays fixed rates for time and materials.