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  • Question

    Does it make sense to utilize "Cost" as an incentive under the CPIF structure given that we will have full EVMS the contractor will be monitored against? I am struggling with the fact that the Government will be paying for the EVMS structure and visibility and then we will also be incentivizing with additional Fee if the contractor can lower his costs? I appreciate whatever input you may have on this situation.


    Answer

    The FAR, at 16.405-1 describes the use and application of Cost Plus Incentive Fee (CPIF) contracts:
     
    FAR 16.405-1 -- Cost-Plus-Incentive-Fee Contracts.
    (a) Description. The cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for the initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. This contract type specifies a target cost, a target fee, minimum and maximum fees, and a fee adjustment formula. After contract performance, the fee payable to the contractor is determined in accordance with the formula. The formula provides, within limits, for increases in fee above target fee when total allowable costs are less than target costs, and decreases in fee below target fee when total allowable costs exceed target costs. This increase or decrease is intended to provide an incentive for the contractor to manage the contract effectively. When total allowable cost is greater than or less than the range of costs within which the fee-adjustment formula operates, the contractor is paid total allowable costs, plus the minimum or maximum fee.
    (b) Application.
    (1) A cost-plus-incentive-fee contract is appropriate for services or development and test programs when --
    (i) A cost-reimbursement contract is necessary (see 16.301-2) and
    (ii) A target cost and a fee adjustment formula can be negotiated that are likely to motivate the contractor to manage effectively.
    (2) The contract may include technical performance incentives when it is highly probable that the required development of a major system is feasible and the Government has established its performance objectives, at least in general terms. This approach also may apply to other acquisitions, if the use of both cost and technical performance incentives is desirable and administratively practical.
    (3) The fee adjustment formula should provide an incentive that will be effective over the full range of reasonably foreseeable variations from target cost. If a high maximum fee is negotiated, the contract shall also provide for a low minimum fee that may be a zero fee or, in rare cases, a negative fee.
    (c) Limitations. No cost-plus-incentive-fee contract shall be awarded unless all limitations in 16.301-3 are complied with.”
     
    The only factor that a CPIF contract is designed to incentive is cost control. 
     
    Earned Value Management Systems (EVMS) provide for cost and schedule visibility/reporting and in-depth analysis of those contractual elements on a monthly basis.  However, the fact that you are funding an EVMS on your contract is completely independent of the cost control incentive under a CPIF contract.  Both EVMS and CPIF contracts track actual costs, but the information is collected differently and used for different purposes.  Again, an EVMS is a monthly cost/schedule reporting system tracking to budgeted costs.  For CPIF contracts, the actual incurred costs are audited at the end of the contract to compare to target cost.  If final actual cost is less than target cost, the contractor earns additional fee above target fee.  If final actual cost is greater than target costs the contractor will lose some amount of fee from the target fee.
     
    Additionally, if you are going to add a performance incentive making this a multiple incentive contract, you are required to include a cost incentive (or constraint) that precludes the contractor from incurring greater costs than the incentive is worth.  Please see paragraph 16.402-4(b) below.
     
    “16.402-4 -- Structuring Multiple-Incentive Contracts.
    A properly structured multiple-incentive arrangement should --
    (a) Motivate the contractor to strive for outstanding results in all incentive areas; and
    (b) Compel trade-off decisions among the incentive areas, consistent with the Government’s overall objectives for the acquisition. Because of the interdependency of the Government’s cost, the technical performance, and the delivery goals, a contract that emphasizes only one of the goals may jeopardize control over the others. Because outstanding results may not be attainable for each of the incentive areas, all multiple-incentive contracts must include a cost incentive (or constraint) that operates to preclude rewarding a contractor for superior technical performance or delivery results when the cost of those results outweighs their value to the Government” [emphasis added].
       

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