Cost-plus-incentive Fee - Cost Formula and Examples

Cost Formula and Examples

To achieve this incentive, in CPIF contracts, the seller is paid his target cost plus an initially negotiated fee plus a variable amount that is determined by subtracting the target cost from the actual costs, and multiplying the difference by the buyer ratio.

For example, assume a CPIF with:

• target costs = 1,000,
• fixed fee = 100 (also called target profit),
• benefit/cost sharing = 80% buyer / 20% seller,

If the final costs are higher than the target, say 1,100, the buyer will pay 1,100 + 100 + 0.2*(1,000-1,100)=1,180 (seller earns 80).

If the final costs are lower than the target, say 900, the buyer will pay 900 + 100 + 0.2*(1,000-900) = 1,020 (seller earns 120)

Final payout = target cost + fixed fee + buyer share ratio * (actual Cost - target cost).

If there is a ceiling price involved and actual cost is more than the ceiling

Final payout = target cost + fixed fee + buyer share ratio * (ceiling price - target cost).

To protect the buyer, it is occasionally agreed to set a ceiling price. This is the maximal price the buyer will be required to pay the seller, regardless of how high the costs have become. It is also occasionally agreed that a bonus be paid if costs are below the Target cost.

See also Point of Total Assumption.