A contractor is conducting a $100,000 contract using a cost plus incentive fee of $10,000. It is agreed to split the pain : gain 80:20 between the buyer : seller (i.e. the seller carries 20% of the pain of gain). On completion the supplier advices that the work cost $90,000. What are you obliged to pay the seller.
As a cost plus contract you pay the cost of $90,000
The saving on the costs in $100,000 – $90,000 = $10,000
This is shared 80:20 with the seller. So they get 20% of $10,000 = $2,000
Hence the adjusted fee is $10,000 + $2,000 = $12,000.
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There is a four step process to these questions
Step one) Work out the pain (over or under spend)
Step two) work out the split of this pain or gain between the seller and buyer
Step three) Calculate the adjusted fee
Step four) work out the total payment (cost plus fee)