Join Bob McGannon for an in-depth discussion in this video Using cost-plus contracts, part of Project Management Foundations: Procurement (2014).
- Confucius is quoted as saying,…life is simple, but we insist on making it complicated.…Cost plus contracts are like that quote.…It's a simple concept, but there are…more complicated variations, however, those variations…can be powerful when managing costs with your seller.…With cost plus contracts, the costs collected…for work completed are reimbursed to the seller,…plus a fee representing a pre-agreed seller's profit.…
In addition, there could also be incentives…for meeting or falling below the agreed costs,…schedule, or other performance targets.…Here are three common cost plus contracts…which provide different incentive and risk schemes.…Cost plus fixed fee, or CPFF,…cost plus incentive fee contracts, or CPIF,…cost plus award fee contracts, or CPAF.…Let's look at each of these in detail.…
With cost plus fixed fee contracts, or CPFF,…you pay the seller for allowable costs…for performing the contract work,…plus a fixed-fee payment calculated as a percentage…of the initial estimated costs.…For example, let's say the agreed cost of a project…
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- Define project procurement.
- Distinguish when to use vendors and partners.
- Compare and contrast building versus buying.
- Identify different types of contracts.
- List types of payment approaches.
- Test your market.
- Build and use a request for information (RFI).