Cost Plus Incentive Fee Calculations For PMP Exam - good read
Most questions in the PMP exam from the Procurement Management Knowledge Area are about the different types of contracts, and choosing the best type of contract in a particular situation. But this one was different…
This interesting Contract Question was however about calculations, requiring you to work out the total payment due to the Contractor (Seller), in Cost Plus or Fixed Price type of contracts.
How to tackle this kind of contract calculation questions for the PMP exam?
First of all, you must know what is a CPIF contract – a Cost Plus Incentive Fee contract. In the CPIF contract, the buyer contracts the seller to reimburse all the costs for the project.
But then, how does the seller make money?
Because only the Actual Cost is covered… So the Buyer agrees to pay an Incentive Fees to the Seller. Thus the name of the contract – CPIF.
However, the seller should not take undue advantage of this situation, knowing that all costs are covered (like having a blank cheque). Because the seller can become complacent, knowing that all costs are covered, and that a profit (incentive) is guaranteed.
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