Cost Plus Fixed Fee (CPFF)
A Cost Plus Fixed Fee (CPFF) contract reimburses the seller for all allowable costs and pays a fixed fee (profit) that does not change regardless of actual costs.
Explanation
In a CPFF contract, the seller receives reimbursement for all legitimate costs incurred in performing the work plus a predetermined fixed fee. The fee is calculated as a percentage of the estimated costs at contract signing and remains constant even if actual costs are higher or lower than estimated. The fee can only change if the scope of work is formally modified.
CPFF provides minimal incentive for the seller to control costs because the seller's profit (the fixed fee) does not decrease when costs increase. The seller receives the same fee whether the project costs $1 million or $2 million. However, the seller does not benefit from cost overruns either, since the fee is fixed.
CPFF is the most common type of cost-reimbursable contract. It is appropriate when the scope is uncertain and the buyer wants the seller to perform work on a best-effort basis without penalizing or rewarding cost performance. It is simpler to administer than CPIF or CPAF because there is no incentive calculation required.
Key Points
- •Fee is fixed at contract signing and does not change with actual costs
- •Seller has minimal incentive to control costs
- •Most common cost-reimbursable contract type
- •Fee only changes if scope is formally modified
Exam Tip
In CPFF, the fee is fixed but the total cost to the buyer is not. The seller has no cost reduction incentive. If the exam asks about a contract with no seller cost incentive, CPFF is the answer.
Frequently Asked Questions
Related Topics
Cost-Reimbursable Contracts
Cost-reimbursable contracts are agreements where the buyer reimburses the seller for all legitimate actual costs incurred in performing the work, plus a fee representing the seller's profit.
Cost Plus Incentive Fee (CPIF)
A Cost Plus Incentive Fee (CPIF) contract reimburses the seller for allowable costs and includes an incentive fee that adjusts based on the seller's performance against agreed-upon cost targets.
Cost Plus Award Fee (CPAF)
A Cost Plus Award Fee (CPAF) contract reimburses the seller for allowable costs plus an award fee based on the buyer's subjective evaluation of the seller's performance.
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