Detail

FIGURE 21-1. Fixed-price-incentive-fee (FPIF) contract with firm target.

If the cost exceeds the target cost, then the contractor must pay 30% of the overrun out of the contractor's profits. However, the fixed-price-incentive-fee (FPIF) contract has a point of total assumption. In this example, the point of total assumption is the point where all additional costs are burdened by the contractor. From Figure 21-1, the point of total assumption is when the cost reaches $10,928. At this point, the final price of $11,500 is reached. If the cost continues to increase, then all profits may disappear and the contractor may be forced to pay the majority of the overrun.

When the contract is completed, the contractor submits a statement of costs incurred in the performance of the contract. The costs are audited to determine allowability and questionable charges are removed. This determines the negotiated cost. The negotiated cost is then subtracted from the target cost. This number is then multiplied by the sharing ratio. If the number is positive, it is added to the target profit. If it is negative, it is subtracted. The new number, the final profit, is then added to the negotiated cost to determine the final price. The final price never exceeds the price ceiling.

Figure 21-2 shows a typical cost-plus-incentive-fee (CPIF) contract. In this contract, the contractor is reimbursed 100% of the costs. However, there is a maximum fee (i.e., profit) of $1,350 and a minimum fee of $300. The final allowable profit will vary between the minimum and maximum fee. Because there appears more financial risk for the customer in a CPIF con-

SHARING 85/15

TARGET COST 10,000

TARGET FEE 750

MAXIMUM FEE 1,350

MINIMUM FEE 300 CONTRACTOR SHARE 15%

BUYER SHARE 85%

15,000 T 13,000 11,000 9,000 7,000 5,000 3,000 1,000 -1,000

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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