Given the following, calculate final fee and final price:

Target cost: 210,000

Target fee: 25,000

Target price: 235,000

Sharing ratio: 80/20

Actual cost: 200,000

210,000 - 200,000 = 10,000 savings

10,000 x 20% = 2,000 share

25,000 incentive (for under target price) + share price (2,000) is 27,000 final fee

200,000 + 27,000 is 227,000

First of all, why is that the 80/20 rule is 80 buyer and 20 seller? In the case of the a cost saving (or coming in under target cost), would it not be a greater incentive it to be 20/80, so that when the cost is an overrun, the buyer only pays 20?

So in the example, the target cost is 210,000, the target fee is 25,000. The target fee is only received if the target cost is met. Since the actual cost is 200,000, the difference between the target cost (210,000) and actual cost (200,000) is 10,000. The seller gets 20 percent of that, given that the sharing ratio is 80/20. So the seller gets 20% of 10,000, which is 2,000, to add on to the target fee of 25,000, making the seller’s target fee 27,000 for a grand total of 227,000.

Given the same information (target cost, target fee, sharing ratio) are the same, and the seller went over target cost by 10,000. If the buyer is to share in the overrun (or savings in the first example) at 80%, then the buyer is to pay 8,000 plus the target cost of 210,000, making the grand total 218,000, since they did not meet the requirements to earn the target fee. (IS THIS CORRECT)?

So… for a savings (coming in under cost) costs the buyer **more **(227000) than if the seller overran cost (218000)??? Is this right? I can see that the incentive provided is there to produce schedule commitments, quality requirements, etc., that would not otherwise be met without the incentive. But in the end, the buyer still pays more.

Because if it were 20/80, in the first example, it would be 8000 + 25000 + 200000 = 233000 (vs the 80/20 of 227000). If the cost were to overrun, it would only cost the buyer 2,000 extra, making the total 212,000.

What am I missing?