CPIF
CPIF type of contract. The project is nogotiated such that if the FINAL costs are less than EXPECTED costs, the sharing formula for cost saving is 80:20. the targetted cost is $500,000 with a 10% fee. if the project comes in the 450,000, what would be the cost of the total contact?
A. 495K
B. 510K
C. 505K
D. 550K
Just wanted to know how is the incentive fee calculated in this case.
Is it - 10% * Actual Cost or 10% * Expected cost?
I get the other pieces of the puzzle
Actual costs = 450K
Saving = 500K - 450K = 50K
Incentive Fee: ???????
Payout to seller as per the sharing formula = 0.20*50K = 10K
Total contract = Acutla Cost + Incentive Fee + Profit Sharing = ANS
Some of the questions calculate using the actual cost, while others use the estimated/expected costs. The behavior is so unexpected and both the answers are always presented as a part of the answer choices.
sspawar
Sat, 04/27/2013 - 17:28
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TARGET COST = 500000
TARGET COST = 500000 (EXPECTED cost)
PROFIT (FEE) = 10% OF TC, = 50000 ( it is Cost + FF in terms of PC +INCENTIVE CONTRACT)
TARGET PRICE = 550000
PROJECT COST AT SELLER (ACTUAL COST bear by seller) = 450000 (FINAL cost)
the FINAL costs are less than EXPECTED costs
BUYERS Sharing %AGE = 80% (if the FINAL costs are less than EXPECTED costs, the sharing formula for cost saving is 80:20.)
BUYERS RATIO = (TC - COST at seller) *BUYERS % in decimal = (500000 -450000) 0.80 = 40000
hence
Payout to Seller = cost of total contract = TP - BUYERS RATIO in amount = 550000 - 40000 = 510K
see blog post dated 14Aug er-sspawar.blogspot.in
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In other way
sellers ratio = (TC - COST at seller) 0.20 = 10000
payout to seller = AC+ fee + SR = 450000+50000+10000= 510K (Total contract = Acutla Cost + Fee + incentive Sharing = ANS)
crushPMP
Sat, 04/27/2013 - 16:39
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I understannd all that, my
I understannd all that, my question is...
Should'nt the Incentive Fee be taking into consideration the ACTUAL COST rather than ESTIMATED COST
Incentive Fee = 10% * Actual Cost
Why base your Fee on the estimated values when you have the real cost in front of you?
sspawar
Sat, 04/27/2013 - 17:26
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because at the time of
because at the time of contract --- you do have only an estimated cost as TARGET COST and FEE is fixed amount , sometime as %age of TC.(as in this case)
final cost comes later
That extra (+/-) cost over TC is then shared as incentive.