Fixed-Price Incentive Fee (FPIF)
A Fixed-Price Incentive Fee (FPIF) contract sets a target cost, target profit, ceiling price, and a share ratio that adjusts the seller's fee based on actual performance against the target cost.
Explanation
FPIF contracts introduce a financial incentive mechanism into the fixed-price structure. The contract establishes a target cost, target profit, ceiling price (the maximum the buyer will pay), and a buyer/seller share ratio. If the seller completes the work under the target cost, the savings are shared between buyer and seller according to the ratio, increasing the seller's profit. If costs exceed the target, the overrun is also shared, reducing the seller's profit.
The ceiling price is a critical element that caps the buyer's total financial exposure. If the seller's actual costs plus the adjusted fee exceed the ceiling price, the seller absorbs all additional costs. This means the contract effectively converts to a firm fixed-price at the ceiling price, with the seller bearing full cost risk above that point.
FPIF is appropriate when the scope is reasonably well-defined but there is some cost uncertainty. The incentive mechanism motivates cost control while providing more flexibility than FFP. It is more complex to administer than FFP because actual costs must be tracked and the fee adjustment calculated.
Key Points
- •Includes target cost, target profit, ceiling price, and share ratio
- •Savings and overruns are shared between buyer and seller
- •Ceiling price caps the buyer's maximum cost exposure
- •Motivates seller cost control through financial incentives
Exam Tip
FPIF has a ceiling price (also called point of total assumption or PTA). Above the PTA, the seller bears 100% of costs. Be prepared to calculate PTA: PTA = ((Ceiling Price - Target Price) / Buyer Share Ratio) + Target Cost.
Frequently Asked Questions
Related Topics
Fixed-Price Contracts
Fixed-price contracts are a category of agreements where the seller is paid a set price for delivering a defined product or service, regardless of the seller's actual costs.
Firm Fixed-Price (FFP)
A Firm Fixed-Price (FFP) contract sets a fixed total price for a defined product or service, and the price does not change regardless of the seller's actual costs.
Cost Plus Incentive Fee (CPIF)
A Cost Plus Incentive Fee (CPIF) contract reimburses the seller for allowable costs and includes an incentive fee that adjusts based on the seller's performance against agreed-upon cost targets.
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Procurement Management
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