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THINGS TO KNOW ABOUT CONTRACT

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THINGS TO KNOW ABOUT CONTRACT Powered By Docstoc
					A cost-plus contract, also termed a Cost Reimbursement Contract, is a contract where a contractor is
paid for all of its allowed expenses to a set limit plus additional payment to allow for a profit. Cost-
reimbursement contracts contrast with fixed-price contract, in which the contractor is paid a
negotiated amount regardless of incurred expenses. Cost-plus contracts first came into use in the
United States during the World Wars to encourage wartime production by large American
companies.

There are four general types of cost-reimbursement contracts, all of which pay every allowable,
allocatable, and reasonable cost incurred by the contractor, plus a fee or profit which differs by
contract type.

 Cost Plus Fixed Fee (CPFF) contracts pay a pre-determined fee that was agreed upon at the time of
contract formation.

Cost-Plus-Incentive Fee (CPIF) contracts have a larger fee awarded for contracts which meet or
exceed performance targets, including any cost savings.

Cost Plus Award Fee (CPAF) contracts pay a fee based upon the contractor's work performance. In
some contracts, the fee is determined subjectively by an awards fee board whereas in others the fee
is based upon objective performance metrics. An aircraft development contract, for example, may
pay award fees if the contractor achieves certain speed, range, or payload capacity goals.

Cost Plus Percentage of Cost pay a fee that rises as the contractor's cost rise. Because this contract
type provides no incentive for the contractor to control costs it is rarely utilized. The U.S. Federal
Acquisition Regulations specifically prohibit the use of this type for U.S. Federal Government
contracting (FAR Part 16.102).

A cost-reimbursement contract is appropriate when it is desirable to shift some risk of successful
contract performance from the contractor to the buyer. It is most commonly used when the item
purchased cannot be explicitly defined, as in research and development, or in cases where there is
not enough data to accurately estimate the final cost.



                       Words from the Pros and cons

Advantages:

In contrast to a fixed-price contract, a cost-plus contractor has little incentive to cut corners.

A cost-plus contract is often used when long-term quality is a much higher concern than cost, such
as in the United States space program.

Final cost may be less than a fixed price contract because contractors do not have to inflate the price
to cover their risk.



Disadvantages:
There is limited certainty as to what the final cost will be.

Requires additional oversight and administration to ensure that only permissible costs are paid and
that the contractor is exercising adequate overall cost controls.

Properly designing award or incentive fees also requires additional oversight and administration.

There is less incentive to be efficient compared to a fixed-price contract.



Recent trends



Between 1995 and 2001 fixed fee cost-plus contracts constituted the largest sub group of cost-plus
contracting in the U.S. defense sector. Starting in 2002 award-fee cost plus contracts took over the
lead from fixed fee cost plus contracts.

 The distribution of annual contract values by sector category and award types indicates that cost
plus contracts in the past carried the largest importance in research, followed by services and
products. In 2004, however, services replaced research as the dominant sector category for cost plus
contracts. For all other contract vehicles combined the relative ranking is reversed to the original
cost-plus order, meaning that products leads, followed by service and research.

 With cost-plus contracting being primarily designed for research and development tasks, the
percent share of cost-plus contracting within a contract is expected to be in correlation with the
percent share of research undertaken in any given program. However, several programs, such as the
F-35, the Trident II, the CVN 68, and the CVN 21 deviate from this pattern by continuing to make
extensive usage of cost-plus contracting despite programs progressively moving beyond the research
and development state.

				
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