Cost plus award fee is a type of contract agreement that offers a performance award to the contractor. The contractor earns this award for excellence in various areas of work, such as:
- Technical skill
- Adherence to a schedule
- Keeping costs low
In a Cost Plus Award Fee Contract the seller is reimbursed for allowable costs. The majority of the fee is only earned based on the satisfaction of identified broad subjective performance criteria. The performance criteria is defined and included in the contract and the fee determination is based solely on the determination of seller performance by the buyer and is usually not subject to appeals.
Contract value = actual costs + buyer-defined performance fee
Several types of contract agreements are used in project management. These influence the decisions made during the planning process. The cost-plus contract, also called the cost reimbursement contract, is one of the most-used types. This contract makes sure sellers get reimbursed for the costs they incur when completing their work.
Different types of work are best rewarded with different award structures. The best contract type to use also depends on the employer. For example, a government contractor might do business much differently than a private company or an individual. It is not always possible to predetermine the objective targets related to the performance evaluation before work begins.
Cost reimbursement contracts allow the buyer to offer incentives based on achieving certain objectives. They are also useful when you can’t clearly predict the work involved at the outset of the project. Three most common types of these contracts include:
- Cost plus fixed fee
- Cost plus incentive fee
- Cost plus award fee
The cost plus award fee (CPAF) is a contract that allows the seller to be reimbursed for the costs of performing the work and earn an additional amount for excellent performance. The amount of this fee is determined by an evaluation according to criteria stated in the contract, and it is generally nonnegotiable. If the performance is unsatisfactory, the buyer will not be paid that fee.
Governmental agencies, such as the Department of Defense, most commonly used this type of contract. Its benefits include:
- Providing an incentive for the contractor to provide better service.
- Providing an incentive for the contractor to create better products.
- A better relationship between the seller and buyer, or client, because good performance will be rewarded.
- Better communication between the contractor and the buyer, because the reward is directly related to both performance and accurate evaluation of that performance.
Cost Plus Award Fee vs. Incentive Fee
Cost plus award fee and cost plus incentive fee contracts are set up similarly. Both contract forms allow the seller to be reimbursed for all costs incurred while completing the work. They both also offer an additional fee on top of that. This additional fee provides their profit for doing the work. There are, however, differences between the two contracts.
In the cost plus award fee contract, the evaluation of the seller’s performance is subjective and determined on a case-by-case basis. Despite this, the amount is final and usually not open to appeal or negotiation.
In the cost plus incentive fee contract, the fee amount is determined by evaluating the seller’s performance using predetermined performance objectives, which are specifically outlined in the contract. This allows for consistency and fairness.