TOPIC: Does the buyer know the seller's cost and PTA in a Fixed Fee Incentive Fee?

For a fixed fee contract, the buyer is given one price and does not know the seller's costs and profit. Is that true in a Fixed Fee Incentive Fee contract, too, in that the buyer still does not know the seller's costs? Does the buyer have enough information to calculate the Point of Total Assumption?

Summer,

The seller's costs are irrelevant for the most part. At the onset of negotiations for a fixed-price incentive fee contract, the buyer will specify the target cost, profit, price ceiling (but not floor), and the formula used to adjust the profit. The seller will be locked into that contract and if their costs overrun the negotiated targets, they bear the extra cost. Meeting targets triggers the incentive money, so this is unlikely to happen.

- Steven

Hello Summer

The FPIF contract includes incentives to control various parameters. Not just the cost, parameters such as schedule or quality can also be targeted using incentives.
In your question, you have specifically mentioned "cost". If such is the case, the seller has to agree for an audit of the project cost by the buyer. If the buyer is unable to validate the actual cost, the seller can simply lie to increase actual profit.

Similarly, if the incentive involves quality, the quality criteria (such as bugs per million lines of code) has to be defined at the start of the project. Later, when the project ends, the buyer should be able to check the actual quality outcome, based on which the incentives will be awarded to the seller.

I hope this helps.
If you are interested in further exploring FPIF contracts, please check out this video.



Regards
Sachin