CPAF, Cost Plus Award Fee, is a type of government contract pricing, commonly adopted when performance is valued over price. These contracts provide the contractor with full reimbursement of allowable costs and an additional award fee based on their performance, rather than their spending.
It is achieved through good performance in areas such as quality, timeliness, cost control, and client satisfaction. A review panel decides the fee based on a subjective evaluation. These contracts are common in high-risk government or defense projects where flexibility, accountability, and results are important.
How Do CPAF Contracts Work?
Cost-Plus-Award-Fee (CPAF) contracts have a two-tiered system:
- First, the contractor is paid a certain amount of money to cover all of its allowable costs. It includes labor, materials, and overhead.
- Second, there’s an additional award fee, which is discretionary and depends on a subjective evaluation of the contractor’s performance.
The key components of a CPAF contract include a target cost, a base fee (often minimal or even zero), and an award fee pool.
- Target Cost: It is the estimated cost of project completion and is used as a reference for budgeting and performance evaluation.
- Base fee: A fixed, minimal, or sometimes zero amount that is paid to the contractor regardless of performance.
- Award fee pool: It is a variable amount reserved for contractors based on their performance evaluations.
A special board or panel reviews the contractors’ work based on certain performance criteria to identify how well they performed. This process is usually conducted quarterly so that the performance can be reviewed and rewarded throughout the project, not just at the end.
Performance Evaluation Criteria
In a CPAF contract, performance is evaluated on the basis of defined criteria and subjective scoring. The main evaluation criteria include:
- Technical performance: Did the work meet the requirements of the project, and was it done correctly?
- Time compliance: Was the contractor on time, or were there delays?
- Cost control: Did he avoid unnecessary expenses?
- Quality of management: Was he able to organize the team, communication, and resources well?
- Client satisfaction: Did the client like the process and outcome?
Each of them is assessed and weighted according to the project criteria. As an example, when technical performance is the highest priority, it may be worth 40%, and cost control may be 20%.
Example: A board can rate the technical performance at 8/10, schedule at 9/10, and cost control at 6/10. A full, partial, or no award fee can be given to the contractor if the overall score falls within a certain range. This strategy pays off on effort, quality, and professionalism, not just on spending less.
When to Use CPAF Contracts?
Here are the 3 criteria to choose CPAF contracts:
High-Complexity Projects with Performance Uncertainty
A CPAF contract is a viable option when a project is too complex, such that its results cannot be measured or anticipated easily. Consider large-scale systems, advanced research, or new technologies. In this situation, success cannot be priced. But this model helps the contractors to perform well in many aspects, such as quality, safety, and innovation, besides reducing the cost. It helps to achieve all-around performance where accuracy and flexibility are key.
Government, Aerospace, and R&D Projects
These contracts are often used by agencies such as NASA and the Department of Defense on long-term or risky projects. Such projects are usually dynamic, where changes are made in the middle of the project. A CPAF structure allows the government to control the contractor’s performance without needing to redefine the contract each time there are changes.
Projects Needing Ongoing Contractor Motivation
Some projects may take years, and it is difficult to maintain performance at a high level. Here, contracts can be used to reward contractors periodically. The award isn’t guaranteed—it’s earned through solid, reviewed performance. This arrangement encourages ongoing improvements and enables course adjustments as necessary, which is invaluable in dynamic, changing projects.
What are the Benefits of the CPAF Contract
The cost-plus-award-fee has the following advantages:
- Promotes high-quality performance: CPAF contracts offer more benefits over budget compliance. Contractors are also encouraged to do high-quality work because their work is evaluated in many aspects, such as technical accuracy and client satisfaction. It results in improved outcomes and reduced shortcuts.
- Flexible incentive mechanism: These contracts are flexible and based on the project’s requirements. In case priorities change during the project, the evaluation criteria can be changed as well, so the contractor stays motivated.
- No penalty for cost overruns: All reasonable costs are reimbursed to contractors, which allows them to concentrate on the job without having to worry about unpredictable costs. There’s no direct penalty for overruns as long as costs are allowed.
What are the Drawbacks of the CPAF Contract
The cost-plus-award-fee has the following disadvantages:
- Subjective evaluation: The award fee is not formula-based. This create disputes when contractors think that they were not evaluated fairly or in a uniform manner. Fairness can be questioned when there are no clear standards of scoring.
- Requires continuous oversight: The contracts require constant monitoring. So, review boards must approve expenses and evaluate performance regularly. This creates extra administrative work for both the client and contractor.
- Limited cost control incentives: Cost savings do not directly increase the contractor’s fee (as under CPIF contracts), and so there is less incentive to lower costs. Contractors may not be efficient in their approach and may increase the overall costs of the project.
- Be Complex to Administer: The contracts often require detailed tasks, strict systems and regular checks. Administration needs to be skilled and attentive to follow through on adjustments and fee calculations.
