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By Vinai Prakash
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One of my PMChamp PMP Coaching Workshop students, Locksley asked me an interesting question
regarding contract calculations. Most questions in the PMP exam from the Procurement Management
Polls Archive
Knowledge Area are about the different types of contracts, and choosing the best type of contract in a
particular situation. But this one was different
This interesting Contract Question was however about calculations, requiring you to work out the total
payment due to the Contractor (Seller), in Cost Plus or Fixed Price type of contracts.
In this post, Ill show you how to tackle this kind of contract calculation questions for the PMP exam.
First of all, you must know what is a CPIF contract a Cost Plus Incentive Fee contract. In the CPIF
contract, the buyer contracts the seller to reimburse all the costs for the project.
But then, how does the seller make money?
Because only the Actual Cost is covered So the Buyer agrees to pay an Incentive Fees to the Seller.
$100,000
$12,000
$14,000
Minimum fee:
$9,000
80/20
Maximum fee:
How much will the seller be reimbursed if the cost of performing the work is $95,000?
A) $98,000
B) $100,000
C) $108,000
D) $114,000
Before we attempt this question, we need to understand the terms set in this question.
http://www.pmchamp.com/cost-plus-incentive-fee-calculations-for-pmp-exam/
10/05/2015
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Sharing Ratio
A CPIF contract has a Sharing Ratio. A 80/20 sharing ratio means that 80% is for the buyer, and 20% is for
the seller. Remember this. The ratio is always written in the Buyer:Seller Ratio format.
Target Cost
Certification
388 views
Target Fee
This is the expected fees that the seller will get. The seller is primarily working to get this fee in doing the
project. Plus there is the expectation of an incentive fee
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Maximum Fee
This is the maximum incentive the Seller can expect to get, based on good performance, and the sharing
ratio.
Minimum Fee
This is the minimum incentive fees the seller will get for meeting the requirements set in the contract.
Calculating Float
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= $1,000 + $12,000
= $13,000
But this is just the incentive. The Seller will also get the costs paid.
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Therefore, the Final Reimbursed Price = Actual cost + Final Incentive Fee
Point Estimates
=$95,000 + $13,000
150 views
= $108,000
Therefore, the answer for this PMP question would be Choice C = $108,000.
B) $119,000
C) $126,000
D) $129,000
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10/05/2015
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FILED UNDER: KNOWLEDGE AREAS, PMP EXAM TIPS, PMP FORMULA QUESTIONS, PROCUREMENT
MANAGEMENT
3 Comments
Dear Prakash
Thank you for the clear example and explanation which solved my doubt on the
different incentive contracts
SP
Wajiha
makes perfect sense when you emphasize the adjustment rule which unfortunately I
forgot to do in the second question. Thanks for that reminder!
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10/05/2015