In the construction sector, cost-plus contracts are drawn up so that contractors can be reimbursed for almost all the actual costs incurred for a project. The cost-plus contract pays the manufacturer the direct costs and the indirect or indirect costs. All expenses must be justified by the documentation of the contractor`s expenses in the form of invoices or receipts. The contract also allows the contractor to collect a certain amount above the amount reimbursed, so he may be able to make a profit – hence the “plus” in higher-cost contracts. Cost-plus contracts can be divided into four categories. They each allow the reimbursement of expenses as well as an additional amount for the profit: why would he ask him to explain this? He just misused the term, that`s all. Moreover, even if the contract were the CPAF and not the CPFF, as he originally stated, the “fee pool” would not normally be reducible simply because it is lower than the estimated cost. This can be done in different ways – a fixed amount per month or all at the end or anything else. If I knew that the period of relaxation of the prejudice is six months, with a total fee of $60, I could make $10 per month (well, less because of the requirement to retain reserves). Or, if there were milestones, I could say $20 when I reach and $20 when it reaches from and the rest at the end (accessible to the fee retention guidelines in the fixed fee clause). Some take what I consider a lazy solution and allow the contractor to charge based on the costs incurred.
Suppose ABC Construction Corp. has a contract for the construction of an office building for $20 million, and the agreement stipulates that the cost must not exceed $22 million. ABC`s profit is agreed at 15% of the total contract price of $3 million. In addition, ABC Construction is entitled to an incentive fee if the project is completed within nine months. The advantages of using these types of contracts are as follows: (1) A fixed-cost contract lends itself to use when the terms of 16-301-2 are in place, and for example — your concern, if true, would result in a deterrent deliberately designed for contractors to save taxpayers` money. It is true that the CPFF type contract does not encourage an entrepreneur to save money, but it also does not intentionally penalize the company for saving money. Most cost-cutting incentive programs involve some kind of carrot that wouldn`t reduce costs (for example. B, value engineering) or that would provide the contractor with a procurement fee or a portion of the cost savings. They make it possible to shift attention from the total cost to the quality of the work done. The above project uses the percentage of the closing process to account for profits and send invoices to the customer, and the contract includes specific percentages for invoicing. For example, let`s say ABC can charge 20% of the total contract price once 20% of the materials are purchased and the customer checks if the concrete foundation is in place. At this point, ABC sends an invoice for 20% of the $20 million to $4 million contract and records 20% of the company`s profits, or $600,000, in the financial statements.
(a) Description. A fixed-cost contract is a reimbursement contract that provides for the payment of a negotiated royalty to the contractor, which is determined at the beginning of the contract. Fixed costs do not vary with actual costs, but may be adjusted due to changes in the work to be performed under the contract. This type of contract allows contracts to be awarded for efforts that might otherwise pose too much risk to contractors, but provides the contractor with a minimum incentive to control costs. (i) the purpose of the contract is to conduct research or exploration or preliminary studies, and the effort required is unknown; or cost-plus contracts are also used in research and development (R&D) activities, where a large company can outsource R&D activities to a smaller company, e.B a large pharmaceutical company working on the laboratory of a small biotech company. The U.S. government also uses cost-plus contracts with military defense contractors who are developing new technologies for national defense. .