HKSM

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?

1. Firm Fixed Price (FFP)
2. Cost Plus Fixed Fee (CPFF)
3. Fixed Price Incentive Fee (FPIF)
4. 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.