Question

A contract with a vendor stipulates a cost plus incentive fee contract. The contract has a target cost of $150,000. The vendor’s target profit is set at 10% and the share ratio is 80/20. The minimum fee the seller will accept is $12,000 and the maximum fee you are willing to pay is $20,000. The actual cost of the contract ends up being $175,000. What is the total cost of the contract to the buyer?

Answer 1

Particulars	Amount($)
Target Cost of the Contract	150,000
Actual Cost of the Contract	175,000
Seller's Sharing Ratio	20%
Target Fee (10% of 150,000)	15,000
Maximum Fee	20,000
Minimum Fee	12,000
The final incentive fee due to the seller is calculated as:
Final Fee = ((Target cost – Actual Cost) * Seller’s sharing ratio) + Target fee
Substituting the values in the above formula, we get
Final Incentive Fee = (( $150,000 – $175,000) * 20% ) + $15,000
= -$25,000 * 20% + $15,000
= -$5,000 + $15,000
= $10,000
This incentive is lower than the Minimum Fee. Thus, the $10,000 will be adjusted upwards to $12,000 (the minimum amount).
The Seller will also get the costs paid.
Therefore, the Final Reimbursed Price = Actual cost + Final Incentive Fee
= $175000 + $12000
=$187,000