Question

When considering Cost-Plus Reimbursable contracts, Company X is negotiation between Cost-Plus-Percentage-of-Costs or Cost-Plus-Fixed Fee. If the estimated costs were 4,500, and the percentage is 10%, and if the actual costs increased to $4,800 - which contract is better for the buyer. please explain

Answer 1

In cost plus percentage of cost contract, buyer has to pay all the cost incured for the contract plus percentage of contract expense that was initially agreed upon where as in  Cost-Plus-Fixed Fee , buyer has to pay all the cost incured for the contract plus fixed fee initially agreed upon

Thus if estimated cost at time of signing contract was 4500$ and 10% was fixed , than estimated cost for buyer was 4500 $+ 10%(4500$)

= 4500$+450$

=4950$

now actual cost came to be 4800 $, thus buyer need to pay = $4800 + 10%($4800)

=$4800 + $480

= $5280

Thus extra cost to be incurred by buyer = $5280 - $4950 = 330$

Thus it is better for buyer to go for Cost-Plus-Fixed Fee as irrespective of cost incurred, fees will be fixed