4.4 Cost-Reimbursement Contract Types (CPFF, CPIF, CPAF) (FAR Part 16)

4.4 Cost-Reimbursement Contract Types (CPFF, CPIF, CPAF) (FAR Part 16)

Cost-Reimbursement Contracts (FAR Subpart 16.3) provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimated total cost for the purpose of obligating funds and a ceiling that the contractor may not exceed (except at its own risk) without the consent of the contracting officer. Cost-reimbursement contracts place the primary cost risk on the government.

---

Mandatory Prerequisites for Use (FAR 16.301-3)

Because cost-reimbursement contracts shift cost risk to the government, contracting officers must satisfy strict statutory prerequisites prior to issuance:

1. Adequate Accounting System: The contractor's accounting system must be audited and determined adequate for accumulating and reporting costs applicable to the contract (FAR 16.301-3(a)(1)).
2. Written Determination and Findings (D&F): The contracting officer must execute a written D&F proving that a cost-reimbursement contract is likely to be less costly than a fixed-price contract or that it is impractical to obtain supplies/services without using cost-reimbursement (FAR 16.301-3(a)(2)).
3. Government Surveillance: Government oversight during performance is required to provide reasonable assurance that efficient methods and effective cost controls are used.
4. Limitation of Cost Clause (FAR 52.232-20): Mandates that the contractor notify the contracting officer in writing within 60 to 90 days whenever it has reason to believe that incurred costs will exceed 75% of the estimated cost of the contract.

---

Absolute Statutory Prohibition on CPPC Contracts

Under 10 U.S.C. 3322(a) and 41 U.S.C. 3905, the Cost-Plus-a-Percentage-of-Cost (CPPC) system of contracting is strictly prohibited. A contract is an illegal CPPC contract if it meets all four criteria:

1. Payment is made on a cost-reimbursement basis;
2. The contractor's fee is expressed as a percentage;
3. The percentage fee applies directly to actual incurred performance costs; and
4. The dollar amount of fee increases automatically as actual incurred costs increase.

Why Prohibited? CPPC contracts create an inherent incentive for contractors to inflate performance costs to maximize fee income.

---

Statutory Fee Ceiling Limitations (FAR 15.404-4(c)(4)(i))

Congress established strict statutory ceilings on the maximum profit/fee that contracting officers may negotiate for cost-plus-fixed-fee (CPFF) contracts:

---

1. Cost-Plus-Fixed-Fee (CPFF) Contracts (FAR 16.306)

A CPFF contract is a cost-reimbursement contract that pays a negotiated fee that is fixed at the time of contract award. The fixed fee does not vary with actual cost experience unless the contracting officer executes a formal modification changing the contract scope.

Two Structural Forms of CPFF

• Completion Form (FAR 16.306(d)(1)): Describes the requirement in terms of a specific end product or deliverable goal. The full fixed fee is paid upon completion and acceptance of the specified end item.
• Term Form / Level-of-Effort (FAR 16.306(d)(2)): Describes the requirement in terms of a specified level of effort (labor hours) to be delivered over a specified time period. The fixed fee is paid pro-rata as hours are delivered.

2. Cost-Plus-Incentive-Fee (CPIF) Contracts (FAR 16.305)

A CPIF contract is a cost-reimbursement contract that provides for an initially negotiated fee to be adjusted by a formula based on the relationship of total allowable costs to total target costs.

Structural Elements of CPIF Contracts

• Target Cost (TC): Baseline estimated performance cost.
• Target Fee (TF): Fee earned if actual cost equals Target Cost.
• Minimum Fee (Min Fee): Lower fee floor guaranteed to contractor regardless of overrun severity.
• Maximum Fee (Max Fee): Upper fee ceiling earned under maximum cost underrun.
• Share Ratio (Government % / Contractor %): Fee adjustment formula for underruns and overruns.

CPIF Fee Formula & Constraints

$\text{Calculated Fee} = \text{Target Fee} + [\text{Contractor Share \%} \times (\text{Target Cost} - \text{Actual Cost})]$ $\text{Final Fee Constraint: } \text{Min Fee} \le \text{Final Fee} \le \text{Max Fee}$ $\text{Total Payment to Contractor} = \text{Actual Allowable Costs} + \text{Final Fee}$

---

CPIF Numerical Example & Fee Floor Analysis

Baseline Parameters

• Target Cost (TC): $10,000,000
• Target Fee (TF): $800,000 (8% of target cost)
• Maximum Fee: $1,200,000 (12% of target cost)
• Minimum Fee: $400,000 (4% of target cost)
• Share Ratio: 80/20 (80% Government / 20% Contractor)

Case 1: Underrun Performance (Actual Cost = $9,000,000)

• Cost Savings: $10,000,000 - $9,000,000 = $1,000,000 underrun.
• Incentive Fee Addition: 20% of $1,000,000 = $200,000.
• Calculated Fee: $800,000 + $200,000 = $1,000,000.
• Check Bounds: $400,000 ≤ $1,000,000 ≤ $1,200,000 (Valid).
• Total Payment: $9,000,000 + $1,000,000 = $10,000,000.

Case 2: Moderate Overrun Performance (Actual Cost = $11,000,000)

• Cost Overrun: $11,000,000 - $10,000,000 = $1,000,000 overrun.
• Fee Reduction: 20% of $1,000,000 = $200,000.
• Calculated Fee: $800,000 - $200,000 = $600,000.
• Check Bounds: $400,000 ≤ $600,000 ≤ $1,200,000 (Valid).
• Total Payment: $11,000,000 + $600,000 = $11,600,000.

Case 3: Severe Overrun Performance (Actual Cost = $13,000,000 — Fee Floor Triggered)

• Cost Overrun: $13,000,000 - $10,000,000 = $3,000,000 overrun.
• Formula Fee Reduction: 20% of $3,000,000 = $600,000 fee reduction.
• Calculated Fee: $800,000 - $600,000 = $200,000.
• Evaluate Bounds: $200,000 is BELOW Minimum Fee ($400,000).
• Final Fee: Fee floor activates — Final Fee = $400,000.
• Total Payment: $13,000,000 (allowable costs) + $400,000 (minimum fee) = $13,400,000.

---

3. Cost-Plus-Award-Fee (CPAF) Contracts (FAR 16.405-2)

A CPAF contract is a cost-reimbursement contract that provides for a fee consisting of a Base Fee (which may be zero, up to a maximum of 3%) and an Award Fee Pool earned based on subjective evaluations of contractor performance.

• Award Fee Board & PEB: A Performance Evaluation Board evaluates contractor technical, management, and cost performance against an established Award Fee Plan.
• Fee Determination Official (FDO): The FDO issues the final award fee rating. The FDO's determination of award fee is subjective and unappealable under the contract Disputes clause (FAR 52.233-1).