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Cost Plus Award Fee Contracts

ACON 025


Alternate Definition
A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of an award amount that the contractor may earn for performance and that is sufficient to provide motivation for excellence in such areas as cost, schedule and technical performance. The amount of the award fee to be paid is determined by the Government’s judgmental evaluation of the contractor’s performance in terms of the criteria stated in the award fee plan (which the DFARS requires be made a part of the contract). This determination and the methodology for determining the award fee are unilateral decisions of the individual refereed to as the Fee Determining Official (FDO).
General Information

Cost-plus-award-fee (CPAF) contracts have been one of the most frequently used incentive contracts in DoD and other agencies. The CPAF contract should be used when the work to be performed is neither feasible nor effective to devise predetermined objective incentive targets applicable to cost, schedule or technical performance. In cost reimbursement contracts when it is not possible to establish pre-negotiated objective targets, it may be necessary to incentivize subjective areas of the contractor’s performance, therefore a cost-plus-award-fee contract may be appropriate.

The CPAF contracts contain attributes that often result in better communication than other types of contracts between the Government and the contractor and greater contractor motivation to achieve exceptional contract performance. These attributes are normally associated with the process of monitoring and evaluating contractor performance.

The philosophy of providing contractors an award fee is based on the premise that the potential improvement in quality of contract performance offsets an additional cost to the contract. How one establishes and allocates fee on a CPAF contract is critical to obtaining the best possible motivation for excellent performance at the most significant times. Note that the DFARS requires 40% of the Award Fee to be in the final evaluation period (DFARS 216.405-2).

The combination of contractor motivation and evaluation flexibility can prove advantageous in the situation making necessary use of a cost reimbursement type contract. It also can encourage more effective communications between the parties and foster a kind of management discipline that is often difficult to sustain in other than an award fee environment. For this reason, many believe the award fee approach is as much a management tool as an incentive contract type.