HKSM
Fixed Price Incentive Fee Contract (FPIF)
A fixed-price agreement where the buyer pays a set amount for the work, and the seller can earn an extra incentive payment by achieving predefined performance targets such as cost, schedule, or technical results.
Key Points
- Combines a firm price with an additional incentive tied to meeting specific performance goals.
- Typically uses target cost, target profit, a ceiling price, and a cost-sharing ratio to calculate final profit.
- If performance goals are missed or costs rise above thresholds, the incentive is reduced or not paid; the ceiling limits the buyer's liability.
- Best when scope is well defined and the buyer wants to motivate cost and schedule efficiency.
Example
A buyer agrees to pay a vendor a fixed $2,000,000 to deliver specialized equipment. The seller can earn up to $100,000 more if delivery occurs by June 30 and the equipment meets an efficiency rating. The contract sets a target cost and an 80/20 share ratio with a $2,300,000 ceiling price; overruns beyond the ceiling are the seller's responsibility.
PMP Example Question
Which contract type sets a firm price but offers the seller an additional fee if agreed performance measures are achieved, often using share ratios and a ceiling price?
- Firm Fixed Price (FFP)
- Cost Plus Fixed Fee (CPFF)
- Fixed Price Incentive Fee (FPIF)
- Time and Materials (T&M)
Correct Answer: C — Fixed Price Incentive Fee Contract (FPIF)
Explanation: FPIF combines a fixed price with a performance-based incentive, commonly using target cost, share ratios, and a ceiling price.
