HKSM

A cost-reimbursable contract in which the buyer pays the seller's allowable, contract-defined costs, and the seller's profit is an incentive fee that is earned and adjusted based on how well agreed performance targets are achieved.

Key Points

• Buyer reimburses only allowable costs as specified in the contract.
• Seller's profit is an incentive fee that increases or decreases with performance.
• Includes targets and a share ratio (e.g., buyer/seller) to calculate fee adjustments.
• Cost risk leans toward the buyer; incentives motivate the seller to control costs and meet goals.

Example

A systems integration project uses CPIF with target cost = $1,000,000, target fee = $100,000, share ratio = 80/20 (buyer/seller), min fee = $60,000, max fee = $140,000. If actual cost is $950,000, the underrun is $50,000. The seller earns 20% of the savings ($10,000), so fee becomes $110,000 (within limits). Total paid: $950,000 + $110,000 = $1,060,000.

PMP Example Question

Which contract type reimburses allowable costs and adjusts the seller's profit using a formula tied to performance targets?

1. Cost Plus Fixed Fee (CPFF)
2. Firm-Fixed-Price (FFP)
3. Cost Plus Incentive Fee (CPIF)
4. Time and Material (T&M)

Correct Answer: C — Cost Plus Incentive Fee (CPIF)

Explanation: CPIF reimburses allowable costs and modifies the seller's fee based on performance using a predefined share formula, unlike CPFF (fixed fee), FFP (fixed price), or T&M (rate-based).