A supplied incentive-fee contract
A fictional buyer and supplier agree a classroom fixed-price incentive model with target cost one hundred currency units, target fee ten, and a ceiling price of one hundred and thirty. Cost differences from target adjust the fee using a seventy-percent buyer and thirty-percent seller sharing rule. The exercise ignores taxes, financing and every clause not stated. Actual allowable cost is first estimated at one hundred and twenty; a second scenario asks about one hundred and forty. One manager wants to add the entire overrun to the fee, while another applies the ceiling only to the cost rather than the final price. The task is to calculate the specified settlement and distinguish that model from an assertion about all real contracts or procurement law.
1. Calculate fee and settlement at actual cost 120.
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The 20 overrun reduces the target fee by 0.30×20=6, leaving fee 4. Price is 120+4=124, below the 130 ceiling.
2. Calculate at cost 140 under the same model.
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The uncapped fee is 10−0.30×40=−2 and uncapped price 138. The ceiling limits payment to 130, so the supplier’s result relative to actual cost 140 is a 10 loss. Actual contract terms govern any real settlement.