A CPFF contract is a contract that covers the actual cost of the project and adds a fixed profit amount for the contractor. The charges remain unchanged even if other parts of the process are changed.
The model is useful when project requirements are constantly changing and its scope is not fixed. The payment by buyers covers direct costs and overhead which involve things like labour, equipment and materials. Setting a fixed fee at the start of the agreement means customers won’t have to renegotiate during cost fluctuations. Organizations such as federal agencies and research institutions generally use CPFF to handle risks.
This formula is used to calculate the total value of a Cost-Plus-Fixed-Fee (CPFF) contract:
Formula:
Total Contract Cost = Actual Allowable Costs + Fixed Fee
What are the Types of CPFF Contracts?
Here are the two types of Cost-Plus-Fixed-Fee (CPFF) contracts:
- Completion Form CPFF
- Term Form CPFF
Completion Form CPFF
A Completion Form CPFF contract expects the contractor to finish every part of the defined scope. The amount paid includes eligible expenses plus a set charge. The process continues until goals are not met. It is best for projects that have precise goals. Even if costs are greater than what was budgeted, the contractor needs to finish the work. The contract is complete when the work is done. This ensures the work is completed successfully, making it a good choice for research and development work.
Term Form CPFF
Term Form CPFF contracts are calculated according to actual work hours. The contractor does certain work for a specific time. The fee consists of the actual expenses and a fixed fee. The contract is ended when either time is up or the resources are used. Projects such as studies and analyses that allow for flexibility can be used. It is not required to have deliverables. The main goal is to provide continuing service, rather than achieve a particular outcome.
When to Use CPFF Contracts?
Here are the three most common scenarios where a Cost-Plus-Fixed-Fee contract works best:
- High-risk or undefined scope projects
- Research and development
- Projects requiring flexibility in scope
High-risk or Undefined-Scope Projects
CPFF contracts are chosen when the project scope or conditions are not clear. They protect contractors from risks by covering their costs and setting a clear fee. It is suitable for exploring ideas, creating prototypes or beginning planning. When the results are hard to predict, CPFF supports forward movement. It supports contractors’ financial security and allows buyers to manage project expenses which is especially useful when risks and needs develop over time.
Research and Development
Research and development tasks require experimentation which makes both expenses and outcomes unpredictable. You can make changes to the plan after signing the contract without negotiating prices again. This is useful for labs, innovation centres and technical institutions that need to adjust to new situations. CPFF supports the effort so that no money is lost during lengthy work or when the outcome or cost is unpredictable.
Projects Requiring Flexibility in Scope
Any project that faces constant changes or updates requires contracts with flexible terms. CPFF enables changes to be made without delaying project work. Contractors are encouraged to adjust, as this payment mix includes real expenses and a fixed fee. This type of contract is ideal when completing feasibility or tech upgrades or when dealing with uncertain factors. Being flexible helps keep everything running smoothly and earns the trust of partners when goals, deadlines or costs change over time.
What are the Benefits and Limitations of CPFF?
Here are the four key benefits and limitations of CPFF contracts:
- Lower financial risk for contractors
- Cost transparency for clients
- Less incentive for cost control
- Administrative complexity
Lower financial risk for contractors
Lower financial risk for contractors exists as they can get reimbursed for all approved costs in the contract. You always receive your profit even if bills are higher than expected. This structure encourages employees to become involved in projects where the cost is not known in advance.
Cost transparency for clients
Clients gain more transparency since all invoices need to be submitted and reviewed before payment. When costs are clear, stakeholders trust that the money is used correctly and changes in tasks can be easily followed.
Less incentive for cost control
Contractors receive all allowable costs from the government, so there’s less incentive to spend less. A constant fee does not allow the contractor to benefit from careful budgeting which can increase waste or unnecessary expenses.
Administrative complexity
The management of CPFF contracts requires close monitoring and careful tracking of all relevant data. Clients are expected to look over their expenses regularly and check the claims they get. It requires both the contractor and the client to spend more time and do more paperwork because of the numerous audits.s why FP-LOE is suitable for initial projects that have not yet defined results but can still be tracked over time.
Not Ideal for Performance-Based Tasks
This contract doesn’t value the outcome achieved. When the focus is on getting a product or service done, using FP-LOE may not work well to boost motivation. It is not suitable for work that demands fixed deadlines, clear standards of excellence or results based on achievements.
