# CPIF -

HI FOLKS HAPPY INDEPENDENCE DAY OF REPUBLIC OF INDIA (15th August) ---------------------------------------------------------------------

I observe at some places that

problems of FPIF and CPIF, has been made jumbled, in each other.

Sometimes CPIF concept are used in FPIF  or vice-vera.

There are many points which can be discussed but at present I put here an excellent example of CPIF, (from wiki), with a graphical support created by me.

To achieve this incentive,

In CPIF contracts, the seller is paid his target cost plus an initially negotiated fee plus a variable amount that is determined by subtracting the target cost from the actual costs, and multiplying the difference by the buyer ratio.

For example, assume a CPIF with:

§ target costs = 1000,

§ fixed fee = 100 (also called Target Profit),

§ benefit/cost sharing = 80% Buyer / 20% Seller,

If the final costs are higher than the target,

say 1100, the Buyer will pay 1000 + 100 + 0.8*(1100-1000)=1180 (seller earns 80 which is less than if he had reached the target cost). 1180 (final payout) - 1100 (actual cost) = 80 profit.

If the final costs are lower than the target,

say 900, the buyer will pay 1000 + 100 + 0.8*(900-1000) = 1020 (seller earns 120 which is more than if he had reached the target cost). 1020 (final payout) - 900 (actual cost) = 120 profit.

Formulas

Final payout = Target cost + Fixed fee + Buyer share ratio * (Actual Cost - Target Cost).

If there is a ceiling price involved and actual cost is more than the ceiling

Final payout = Target cost + Fixed fee + Buyer share ratio * (ceiling price - Target Cost).

To protect the buyer, it is occasionally agreed to set a ceiling price. This is the maximal price the buyer will be required to pay the seller, regardless of how high the costs have become. It is also occasionally agreed that a bonus be paid if costs are below the Target cost.

The graphical presentation of CPIF

http://er-sspawar.blogspot.in/2012/08/cost-plus-incentive-fee-contract.html

or

http://er-sspawar.blogspot.in/

There is one single formula - for solving sellers payout, no where it will  briefed so.

deducting the [AC +TF] from that seller's payout - Incentive can be find out.

Cheers

hi guys