Incentive fee calculation

Submitted by sunitaPMP on Thu, 03/07/2013 - 05:46

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

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PMP / CAPM exam Question bank
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sspawar

Thu, 03/07/2013 - 06:25

This question is asking - how much is total contract cost 

--------------------

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.

----------------------

 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)

sunitaPMP

Thu, 03/07/2013 - 06:48

Thank you Pawar Ji

kmkan28

Thu, 03/07/2013 - 10:36

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

 

 

                                       

 

 

AP

Thu, 03/07/2013 - 10:55

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.

kmkan28

Thu, 03/07/2013 - 11:01

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

The answer will be 310,000.

 

Mani

 

AP

Thu, 03/07/2013 - 11:07

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.

kmkan28

Thu, 03/07/2013 - 11:09

Dear Arun!

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

:)

Mani

 

 

 

 

AP

Thu, 03/07/2013 - 11:10

Thanks for your clarificaiton Mani.


Regards,


Arun.

sunitaPMP

Thu, 03/07/2013 - 19:27

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%