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.