# Incentive fee calculation

Please help me with this question.I am not able to understand Target cost ,Target price etc in this context.

Q:You are completing the closeout of a project to design a warehouse in Columbus, Ohio. The contract is a Cost Plus Incentive Fee contract. The target costs are \$300,000, with a 10 percent target profit. However, the project came in at \$275,000. The incentive split is 80/20. How much is the total contract cost??

1. \$300,000

2. \$275,000

3. \$310,000

4. \$330,000

### This question is asking - how

This question is asking - how much is total contract cost

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If It is estimated Contract Cost of project , then

Target Price (TP) = TC +TF = 300000+10%OF300000=330000 (option D) , TC = target cost,  TF = target fee.

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If it is actual total contract cost = sellers payment, then

You may refer post dated 14/08/12 on

er-sspawar.blogspot.in

Sellers Payment = TP+/ - BR

BR = Amount above or below of TC X 0.80 = (300000-275000) X 0.80 = 20000 (it is below of TC)

Sellers Payment = 330000 - 20000 = 310000 (option C)

### Thank you Pawar Ji

Thank you Pawar Ji

### Need Clarification

Dear pawar,

This is the way i have done for the exercise

Target cost =\$300,000

Target fee  =\$30,000

Actual cost=\$275,000

Ratio         =80/20

Target cost-Actual cost=300,000-275000

=125,000

Seller ratio                     =125000*.20

= 25,000.

Final fee                       =30,000+25000 =55,000

Final Price                    =275000+55000

Contract price               =330,000

But the question asks for Contract cost.Actual cost we know =275000.

From your formula you have mentioned The term as BR.What is that?

Is there any way to bring it from the above exercise?.Please advise!

Mani

### If you solve this by the

If you solve this by the method given in Rita's book:

Target cost = 3,00,000

Target Profit = 10% of 300000 = 30,000

Actual cost = 2,75,000

Seller's share of savings = 20% * (3,00,000 - 2,75,000) = 0.2 * 25,000 = 5,000

Total contract cost = Actual cost + Target Profit +/- Seller's share

Total contract cost = 2,75,000 + 30,000 + 5,000 = 3,10,000

Note: BR mentioned in Pawar Ji's explanation is Buyer's Ratio.

Regards,

Arun.

### There is a mistake

The calculation would be

Target cost-actual cost

=300000-275000

=25000

Ratio =80/20

then the fee will be 5000

Since the contract is under the estimated cost the incentive will be =30,000+5000=35000

Final Price :=275000+35000=310,000

Mani

### Mani, Can you please let me

Mani,

Can you please let me know where is the mistake in my explanation so that I can corerct it if it is really wrong?

I think whatever we both have mentioned are the same.

Regards,

Arun.

### Dear Arun!I supposed to write

Dear Arun!

I supposed to write there is  a mistake in my previous calculation...Sorry it is not yours!.

:)

Mani

Regards,

Arun.

### Hi Mani1 correctionTarget

Hi Mani

1 correction

Target cost-Actual cost=300,000-275000=25,000

BR means Buyer Ratio.Here sharing ratio is 80/20,that means Buyer wil have 80% and Seller will have 20%

zzzzz2018.10.12

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