Formula: Cost plus Fixed Fee = Cost + n
This is done in a contract where the buyer agrees to pay all the costs plus a pre-decided amount to the seller. ‘n’ stands for the fixed amount that is to be paid apart from the costs. With the cost at 50 and ‘n’ at 5 that calculation will be a simple addition.
Cost + n
= 50 + 5
While the buyer pays 55, if the cost increases to 70, the buyer will pay 75.
Formula: Cost plus Award Fee = Cost + n
In this method the seller does get paid for the cost incurred with the addition of a fixed fee called an award fee. This is a more dynamic type of scenario where n is calculated based on pre decided guidelines. If the Cost is 50 and ‘n’ is 8, then the Cost-plus award fee would be
Cost + n
50 + 8
The buyer pays 58 in this scenario.
Formula: Cost plus Incentive Fee = Cost + n
This is like the cost-plus award fee model; the key difference is that the incentive is paid only when the project is completed within the estimated period. In this model the magnitude of incentive will depend on the speed with which the project gets completed. This is also a scenario where ‘n’ depends on how quickly the project got completed. The incentive might be 8 if the project is finished within 8 weeks. For 8 to 10 weeks the incentive drops to 4. For more than 10 weeks there is no incentive. If the cost is 50 and the project is finished in 9 weeks, then the Cost-plus incentive fee would be.
Cost + n
=50 + 4
The buyer pays 54 in this case, if the cost remains constant and the project is completed in 11 weeks the buyer pays only 50.