Question

In a Cost-Plus Incentive Fee contract, the target cost is $200,000 and the target fee is $9000. The seller and buyer agree to share the saving/loss with 70% to the buyer and 30% to the seller.

Target cost = $200,000

Target fee = $9000

Calculate the final fee and final price if the project is over and

a) the buyer has agreed that the costs are in fact $240,000.

b) the buyer has agreed that the costs are in fact $170,000.

Answer 1

Solution:

The formula for Final price is:

Final fee = [(Target cost - Actual cost) * (saving or loss share of the seller)] + target fee

Final price = Actual costs + final fee

a.) When the actual costs is $240,000

Step 1:

Final fee = [(Target cost - Actual cost) * (saving or loss share of the seller)] + target fee

Final fee =[(200,000 - 240,000) * (30%)] + 9000

Final fee =[-40,000*30%] + 9000

Final fee = -12,000+9000

Final fee = -$3000

Step 2:

Final price = Actual costs + final fee

Final price = 240,000 - 3000

Final price = $237,000

Answer: Final fee = -$3000 and Final price = $237,000 When the actual costs is $240,000.

b.) When the actual costs are $170,000

Step 1:

Final fee = [(Target cost - Actual cost) * (saving or loss share of the seller)] + target fee

Final fee = [(200,000 - 170,000) * (30%)] + 9000

Final fee = [30,000 * 30%] + 9000

Final fee = 9000 + 9000

Final fee = $18,000

Step 2:

Final price = Actual costs + final fee

Final price = 170,000 + 18,000

Final price = $188,000

Answer: Final fee = $18,000 and Final price = $188,000 When the actual costs are $170,000.