CPM/U2 Topic 6 Cost Plus Fixed Fee Contract
A cost-plus fixed fee contract is a specific type of contract wherein the contractor is paid for the normal expenses for a project, plus an additional fixed fee for their services. These allow the contractor to collect a profit on the project, and they encourage economic production in various industries.
In general, the expenses in a cost-plus fixed fee are calculated according to market values. However, the “fixed fee” portion of the contract may be subject to negotiation between the parties, and can therefore vary according to the needs in each project. Cost-plus fixed fee contracts are sometimes referred to as CPFF contracts, cost-plus contracts, cost-reimbursement contracts, and cost + fixed fee contracts.
When is a Cost Plus Fixed Fee Contract Used?
Cost plus fixed fee contracts can be used when both the contractor and the owner agree that the contractor is entitled to a fee in addition to the project expenses. There may be various reasons for this agreement, but cost-plus contracts should also spell out the basic reasons that the contractor is entitled to the fee. There should also be provisions addressing what legal consequences should follow if the fee provisions aren’t upheld.
Advantages of cost-plus fixed fee contract contract can include:
- The final cost may be lower than in a normal contract, as the contractor usually will not “inflate” prices to cover risks.
- The contractor also has less incentive to control the project costs (in contrast to other types of contracts, such as a fixed-price contract).
- They can often ensure higher-quality output than normal contracts.
Disadvantages of cost-plus fixed-fee contracts may include:
- The final, overall cost may not be very clear at the beginning of negotiations
- May require additional administration or oversight of the project to ensure that the contractor is factoring in the various cost factors
- May be less incentive to complete the project in an efficient manner, compared with fixed-price contracts
Thus, both parties should weigh all the pros and cons before entering into a cost plus fixed-price contract. Again, each contract will be different, depending on the type of project involved and the relationship of the parties.
Pros and Cons of Cost Plus Fixed-Fee Contracts
Depending on the parties’ needs, there may be different pros and cons to using a cost-plus fixed fee contract arrangement. In order to avoid a breach of contract, both parties should consider these aspects of cost-plus contracts.