Cost Plus Incentive Fee(CPIF)
A contract type that reimburses allowable costs and includes a fee that varies based on performance against cost and/or technical targets.
Overview
A Cost Plus Incentive Fee (CPIF) contract reimburses the contractor for allowable costs and pays a fee that adjusts based on the relationship of actual costs to a target cost. The fee formula includes a target fee, minimum and maximum fee limits, and a share ratio that determines how cost overruns or underruns are split between the government and contractor. This structure motivates cost control while recognizing the uncertainty inherent in complex development work.
Why It Matters in GovCon
CPIF contracts are commonly used for development and R&D programs where costs are uncertain but the government wants to incentivize efficiency. Contractors must understand the fee adjustment mechanics — coming in under target cost increases the fee, while overruns reduce it. Strong cost management directly impacts profitability on CPIF contracts.
Key Details
- Share Ratio: A typical share ratio might be 70/30 (government/contractor), meaning the contractor bears 30% of overruns and retains 30% of underruns.
- Fee Range: The contract specifies minimum and maximum fee percentages that cap the contractor's fee regardless of cost performance.
- Target Cost: The negotiated cost estimate used as the baseline for fee adjustments.
- Multiple Incentives: Some CPIF contracts also include incentives for schedule or technical performance in addition to cost.
- FAR Reference: Governed by FAR 16.405-1.
Related Terms
- Cost Plus Fixed Fee (CPFF)
- Cost Plus Award Fee (CPAF)
- Firm Fixed Price (FFP)
- Incentive Fee
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