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Types of Cost-based Contract (1. Cost + Incentive Fee :red_flag:…
Types of Cost-based Contract
1. Cost + Incentive Fee
:red_flag:
Description
Base price is based on allowable supplier costs
Any cost savings are shared btw buyer & supplier based on predetermined rate for a designated time period
Appropriate for cases where both parties are relatively certain about the accuracy of the initial target cost estimates
Buyer Risk
Medium
Supplier Risk
Medium
2. Cost Sharing :red_flag:
Description
Actual allowable cost are shared between parties on a predetermined % basis
May include cost productivity improvement goals
Key Success:
identification of a firm set of operating guidelines, goals & objectives for the contract
When in doubt, both parties need to spell out their expectations in detail to avoid confusion & misunderstanding
To determine & specify the roles & objectives of who are responsible for certain areas
Buyer Risk
High
Buyer need to bear the cost whenever the material cost rises
Supplier Risk
Low
When material cost increase, buyer will share the cost difference
3. Time & Materials Contract :red_flag:
Description
Supplier is paid for all labor & materials according to a specified labor, overhead, profit & material rate
Generally used in plant & equipment maintenance agreement
where supplier can't determine accurate costs prior to the repair service
Indicate labor rate (per-hour basis) + overhead & profit %
resulting in "not-to-exceed" total price
Buyer Risk
High
Has little control over the estimated maximum price
labor hours spent need to audited carefully
Supplier Risk
Low
4. Cost + Fixed Fee :red_flag:
Description
Supplier receives reimbursement for all allowable costs up to a predetermined amount
Plus fixed fee which is a percentage of the targeted costs of goods / services
provide little motivation for supplier to improve its costs over the life of the contracts
Buyer Risk
High
Supplier Risk
Low
Supplier is guaranteed at least a minimal profit above its allowable costs