Cost-Reimbursable Contracts

Posted on April 17, 2009 by

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As project managers work with procurements, it’s important that they understand the different types of contracts. Contract Types is a tool of the fourth edition PMBOK®’s Plan Procurements process. There are a variety of contract types falling under the general categories of Fixed Price, Cost Reimbursable, and Time and Materials. The types of Cost Reimbursable contracts (as termed in the PMBOK®) are Cost Plus Fixed Fee (CPFF), Cost Plus Incentive Fee (CPIF), and Cost Plus Award Fee (CPAF). Note that the definitions have changed slightly since the last edition of the PMBOK®. Cost Reimbursable contracts reimburse the seller for their actual costs. Below are examples of each.

Cost Plus Fixed Fee (CPFF). The seller is reimbursed for their actual costs plus given a percentage of those costs. Katy’s neighbor pays her for the cost of ingredients plus 50% of those costs in return for ten dozen of Katy’s homemade oatmeal raisin cookies. The ingredients cost $40, so Katy is paid $40 plus 50% of $40 (which is $20), which totals $60.

Cost Plus Incentive Fee (CPIF). The seller is reimbursed for their actual costs plus given a financial incentive if an agreed-upon objective is met. Katy’s neighbor offers to pay her for the cost of ingredients in return for ten dozen of Katy’s award-winning sugar cookies, plus $20 if she can finish the cookies before 7:00pm this evening.

Cost Plus Award Fee (CPAF). The seller is reimbursed for their actual costs plus a financial incentive based on criteria that are at the buyer’s discretion. Katy’s neighbor offers to pay her for the cost of ingredients for 100 of Katy’s peppermint chip cookies, plus $50 if the neighbor decides they are the best cookies she has ever eaten in her entire life.