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Introduction to contract types and pricing models
If you have a written RFP, it will probably include instructions for how to format the pricing and contractual details. If not, how you format your pricing is up to you. If you are looking for a little guidance to get started, consider the contract types below. Each has a different way of accounting for costs, fees, and profits. There are contract types not on this list, and many, many variants. Depending on what you are proposing you might follow one of the structures below or do something totally different. The final judge of whether you have presented your pricing properly is your customer. Consider how they will want to pay for what you are proposing.
- Time and Materials (T&M). Payments are based on hourly rates and costs of materials used, up to a not-to-exceed amount.
- Cost-Reimbursement. Reimburses the Contractor for incurred costs. This pricing arrangement enables contractors to take on financial risk, but it provides little incentive to control costs.
- Cost-Plus-Fixed-Fee (CPFF). Reimburses the Contractor for costs and adds a negotiated fee (i.e., fixed dollar amount or percentage).
- Cost-Plus-Incentive-Fee (CPIF). Reimburses the Contractor for costs and adds a negotiated fee, which is adjusted by a formula based on target costs, providing an incentive to keep costs low. Note: This type of contract may also include fee adjustment as an incentive for the Contractor to meet or surpass negotiated performance targets.
- Cost-Plus-Award-Fee (CPAF). Consists of a base fee (which may be zero) and an award fee, determined at periodic milestones set forth in the Contract.
- Firm-Fixed Price (FFP). The price is set and fixed by unit of product or measure. FFP contracts impose the maximum risk on the Contractor and minimum administrative burden on the customer.
- Fixed-Price Contract with Escalation (FPE). Establishes a fixed contract price, but provides for adjustment based on specified contingencies, such as an economic price adjustment.
- Fixed-Price Incentive (FPI). A fixed-price contract that provides for adjusting profit and establishing the final contract price by application of a formula based on the total target cost.
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