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Hello, Namaste, Konnichiwa!! Welcome from Sunny Sensei. In this lesson we will solve problems on cost plus incentive fee or the CPIF contracts. At the end of the lesson there is also a problem for you to solve. The first one is on the screen. We have a cost plus incentive fee contract with target cost of dollar 100,000 target fee of 14,000 dollars maximum fee of 18,000 dollars minimum fee of $10,000 share ratio is 70 to 30 and actual cost is dollar 78,000 How much will the buyer pay to the seller at the completion of the project? We have to find the actual price. For most incentive fee problems it is best to start with the cost variance. Cost variance captures the cost risk or the gap between target and the actual cost. Cost variance is given as target cost minus the actual cost. Target cost is 100,000 and actual cost is 78,000. We have the cost variance as $22,000 Next we will find how much of this cost variance is sellers responsibility. Sellers share of risk is cost variance m
