A Cost Plus Incentive Fee (CPIF) contract has the following parameters:
Target Cost = $500, 000
Target Fee = $45, 000
Share Ratio 50/50%
Maximum Fee = $60, 000
Minimum Fee = $30, 000
The seller completes the work with the buyer’s permission for an actual cost of $450, 000. No additional scope was added to the project. What is the final price paid that the seller receives?
a. $470, 000
b. $480, 000
c. $510, 000
d. $520, 000
Aileen’s PMP® Sample Question Solution on CPIF Calculation
Answer (c) is the best answer.
To answer questions such as this I ask myself a series of questions:
Q. What is the contract type?
Cost Plus Incentive Fee (CPIF).
Q. Do we have an over run or under run and by how much?
The target cost is $500, 000.
The actual cost is $450, 000.
There is an under run of $50, 000.
Q. Will the fee be increased or decreased from the target fee and by how much?
Since there is an under run the seller’s fee will increase by the seller’s percentage of the overrun. The seller’s percentage is 50%.
The seller’s percentage is always the second number of the share ratio.
The adjustment to the seller’s fee will be 50% of $50, 000.
Fee adjustment = 50% * $50, 000 = $25, 000.
Q. What is the actual fee?
Actual fee = target fee + fee adjustment. The $25, 000 is being added since there is an under run. The seller is being rewarded for the under run.
Actual fee = Target fee + fee adjustment
Actual fee = $45, 000 + $25, 000
Actual fee = $70, 000
Q. Is the actual fee between the minimum fee and the maximum fee?
No. Therefore, $70, 000 cannot be the actual fee. The actual fee must be between the minimum and the maximum fee. The actual fee will be the maximum fee of $60, 000.
Q. What is the actual price?
Actual price = actual cost + actual fee
Actual price = $450, 000 + $60, 000.
Actual price = $510, 000.
Since this is a cost plus incentive fee (CPIF) contract and not a fixed price incentive fee (FPIF) contract there is no price ceiling to review.
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