Upload
hatakerj
View
31
Download
0
Embed Size (px)
DESCRIPTION
COST PLUS
Citation preview
7/18/2019 Cost Plus Incentive Fee Calculations For
http://slidepdf.com/reader/full/cost-plus-incentive-fee-calculations-for 1/3
PMCHAMPPMCHAMPAccelerate Your Career in Project Management!Accelerate Your Career in Project Management! Search this website… Search
COST PLUS INCENTIVE FEE CALCULATIONS FOR PMPEXAM
18Curtir Curtir
By Vinai Prakash
One of my PMChamp PMP Coaching Workshop students, Locksley asked me an interesting question
regarding contract calculations. Most questions in the PMP exam from the Procurement Management
Knowledge Area are about the different types of contracts, and choosing the best type of contract in a
particular situation. But this one was different…
This interesting Contract Question was however about calculations, requiring you to work out the total
payment due to the Contractor (Seller), in Cost Plus or Fixed Price type of contracts.
In this post, I’ll show you how to tackle this kind of contract calculation questions for the PMP exam.
First of all, you must know what is a CPIF contract – a Cost Plus Incentive Fee contract. In the CPIF
contract, the buyer contracts the seller to reimburse all the costs for the project.
But then, how does the seller make money?
Because only the Actual Cost is covered… So the Buyer agrees to pay an Incentive Fees to the Seller.
Thus the name of the contract – CPIF .
However, the seller should not take undue advantage of this situation, knowing that all costs are covered
(like having a blank cheque). Because the seller can become complacent, knowing that all costs are
covered, and that a profit (incentive) is guaranteed.
Therefore, the Buyer sets out clear guidelines for the incentives, and a profit sharing ratio. There is a good
chance of making a decent profit, and there is a penalty to finish the project later, or at a higher cost than
targeted.
This incentives the Seller to:
1. Keep the costs as low as possible,
2. Finish the contract as early as possible,
3. And generate the maximum incentive and profit.
Question: A cost-plus-incentive-fee contract has the following characteristics:
Sharing ratio: 80/20
Target cost: $100,000
Target fee: $12,000
Maximum fee: $14,000
Minimum fee: $9,000
How much will the seller be reimbursed if the cost of performing the work is $95,000?
A) $98,000 B) $100,000 C) $108,000 D) $114,000
Before we attempt this question, we need to understand the terms set in this question.
Free PMP Exam Tips + 20 Quality
Management Questions
Name:
Email:
Send PMP Tips & Free Qs
POLLS
What's your biggest issue for PMPexam?
Eligibility for the Exam
No time to Study
Formula Questions
Can I Study at Home?
How do I Get the 35PDU cert?
Memorizing ITTOs
Vote
View Results
Polls Archive
GET LATEST PMP ARTICLES FEED
Enter your email address:
Subscribe
Latest PMP Prep Posts by FeedBurner
BEGIN YOUR PMP EXAM PREPARATION
Training Begins Sunday May 10
HOW CAN WE HELP YOU?
Click here & tell us what you need to attain
the PMP Certification.
FREE PMP MOCK TEST
Have you tried our PMP Mock Test yet?
Check it out, and tell us how well you
scored in the mock test. Start the PMP
Mock Test Enjoy. And ALL THE BEST!
ONLINE PMP EXAM TRAINING VIDEOS
You are here: Home / Knowledge Areas / Cost Plus Incentive Fee Calculations For PMP Exam
PMP ARTICLES ONLINE PMP TRAINING FORUM NEWSLETTER RESOURCES TESTIMONIALS FAQ ABOUT CONTACT
10 Email Share
GET FREE PMPExam Preparation Tips, TriMock Questions, Resourc
Much More... in your Em
Just enter your name & email below &the Subscribe Me button now...
BONUS: Get 20 PM P Mock Questions on PQuality Management by email, for Free, to pra
Name:
Email:
Send Me PMP Tips
Your details will always be held in the strictest of
confidence and will not be shared with any 3rd parties.We hate spam as much as you do.
Email Address SubmitGet PMP Exam Tips
Página1 de3CPIF Contract Calculations for the PMP Exam | PMChamp
10/05/2015http://www.pmchamp.com/cost-plus-incentive-fee-calculations-for-pmp-exam/
7/18/2019 Cost Plus Incentive Fee Calculations For
http://slidepdf.com/reader/full/cost-plus-incentive-fee-calculations-for 2/3
Sharing Ratio
A CPIF contract has a Sharing Ratio. A 80/20 sharing ratio means that 80% is for the buyer, and 20% is for
the seller . Remember this. The ratio is always written in the Buyer:Seller Ratio format.
Target Cost
The expected cost, or the target cost of this project.
Target Fee
This is the expected fees that the seller will get. The seller is primarily working to get this fee in doing the
project. Plus there is the expectation of an incentive fee…
Maximum Fee
This is the maximum incentive the Seller can expect to get, based on good performance, and the sharing
ratio.
Minimum Fee
This is the minimum incentive fees the seller will get for meeting the requirements set in the contract.
Calculating the Final Incentive Fee
The final incentive fee due to the seller is calculated as:
Final Fee = ((Target cost – Actual Cost) * Seller’s sharing ratio) + Target fee
Substituting the values in the above formula, we get
Final Incentive Fee = (( $100,000 – $95,000) * 20% ) + $12,000
= $5,000 * 20% + $12,000
= $1,000 + $12,000
= $13,000
But this is just the incentive. The Seller will also get the costs paid .
Therefore, the Final Reimbursed Price = Actual cost + Final Incentive Fee
=$95,000 + $13,000
= $108,000
Therefore, the answer for this PMP question would be Choice C = $108,000.
Another variation of this questions is given below:
Question: Using the same data as above, what will be the reimbursement to the seller if
the cost of performing the work is $120,000?
A) $112,000 B) $119,000 C) $126,000 D) $129,000
Calculating the Final Incentive Fee
Do note here that the Actual cost is $120,000, and it is ABOVE the Target Cost. Thus, the seller has
exceeded the costs, and will be penalized.
The final incentive fee due to the seller is calculated as:
Final Fee = ((Target cost – Actual Cost) * Seller’s sharing ratio) + Target fee
Substituting the values in the above formula, we get
Final Incentive Fee = (( $100,000 – $120,000) * 20% ) + $12,000
= -$20,000 * 20% + $12,000
= -$4,000 + $12,000
= $8,000
This incentive is lower than the Minimum Fee. Thus, the $8,000 will be adjusted upwards to $9,000
(the minimum amount). The Seller will also get the costs paid.
Therefore, the Final Reimbursed Price = Actual cost + Final Incentive Fee
=$120,000 + $9,000
= $129,000
Therefore, the answer for this PMP question would be Choice D = $129,000.
EXAM TIP: Remember to adjust the Incentive to factor the Minimum Fee and the Maximum Fees. This is
precisely set in the first place, within the CPIF contract, so that the seller does not make an unduly high
profit. But is incentivised to make the most of it too!
Let me know if this makes sense. Do post a comment, and share your thoughts.
If you liked this post, do Like us on Facebook,
and spread the word among other PMP aspirants.
And if possible, do join the PMChamp Online
PMP Coaching Program to Begin to Prepare
for the PMP exam in just 6 weeks . Coaching
Classes begin on Monday.
All The Best!
Cheers,Vinai Prakash, PMP
Founder: PMChamp – Helping you prepare for the PMP Exam with Tips, Tricks, and Techniques.
Related posts:
POPULAR PMP ARTICLES TODAY
Create a Study Plan for PMP Exam
Certification
388 views
Components of Scope Baseline for PMP
305 views
Point of Total Assumption Calculations on
PMP Exam
267 views
3 Things You Need to Know About Projects
and Operations
251 views
Cost Plus Incentive Fee Calculations For
PMP Exam
241 views
Do you need to memorize ITTO for the
PMP Exam
206 views
Simple Formula Questions Part 2 –
Calculating Float
196 views
Difference between Contract Closure &
Administrative Closure for PMP Exam
173 views
Simple Formula Questions Part 1 – Three
Point Estimates
150 views
Configuration Management & Change
Management System: Differences
149 views
Página2 de3CPIF Contract Calculations for the PMP Exam | PMChamp
10/05/2015http://www.pmchamp.com/cost-plus-incentive-fee-calculations-for-pmp-exam/
7/18/2019 Cost Plus Incentive Fee Calculations For
http://slidepdf.com/reader/full/cost-plus-incentive-fee-calculations-for 3/3
1. Contract Types for PMP Exam
2. Simple Formula Questions Part 1 – Three Point Estimates
3. Simple Formula Questions Part 2 – Calculating Float
4. Point of Total Assumption Calculations on PMP Exam
FILED UNDER: KNOWLEDGE AREAS, PMP EXAM TIPS, PMP FORMULA QUESTIONS, PROCUREMENT
MANAGEMENT
3 Comments 1
Chee Khang Ang
Dear Prakash
Thank you for the clear example and explanation which solved my doubt on the
different incentive contracts
SP
This is awesum. Thanks a lot. I have these concepts clear now.
Wajiha
makes perfect sense when you emphasize the adjustment rule which unfortunately I
forgot to do in the second question. Thanks for that reminder!
CATEGORIES
About PMP
Art of Project Management
Cost Management
Decision Making
Knowledge Areas
Management Theories
PMP Exam Prep Coaching
PMP Exam Preparation Basics
PMP Exam Tips
PMP Formula Questions
PMP Questions
PMP Resources
PMP Study Plan
Procurement Management
Project Management Best Practices
Time Management
TOP PMP EXAM ADVICE BY VINAI PRAKASH
Create a Study Plan for PMP Exam Certification
Components of Scope Baseline for PMP
Point of Total Assumption Calculations on PMP
Exam
Cost Plus Incentive Fee Calculations For PMP Exam
3 Things You Need to Know About Projects and
Operations
Simple Formula Questions Part 2 – Calculating Float
Do you need to memorize ITTO for the PMP Exam
Configuration Management & Change Management
System: Differences
Difference between Contract Closure &
Administrative Closure for PMP Exam
Simple Formula Questions Part 1 – Three Point
Estimates
Best Resources for PMP Exam (Free & Paid)
Monte Carlo Simulation Questions for PMP Exam
RECENT POSTS
Why Do You Want To Achieve PMP Certification?
PMP Exam Preparation Test
PMP Strategy: How to Study & Answer PMP
Questions
Help! I Failed The PMP Exam Today… WHY?
What’s Keeping Your From Achieving PMP
Certification?
Return to top of page Copyright © 2015 · Corporate Theme on Genesis Framework · WordPress · Log in
Página3 de3CPIF Contract Calculations for the PMP Exam | PMChamp
10/05/2015http://www pmchamp com/cost-plus-incentive-fee-calculations-for-pmp-exam/