Cost-plus-fixed-fee (CPFF) contracts are a popular type of procurement arrangement in which the buyer pays the seller a fee that is fixed regardless of the actual cost of the project. These contracts are typically used in government contracting and construction projects. There are two forms of CPFF contracts that are preferred by buyers and sellers alike.

The first form is the Incremental CPFF contract. Under this type of contract, the buyer agrees to pay the seller a fixed fee, but the fee is paid in increments as certain milestones are met. The milestones can be based on specific tasks completed or based on time elapsed. This type of contract is preferred by buyers because it aligns the seller`s incentives with their own. The seller is incentivized to complete tasks in a timely manner to receive payment, which can lead to a higher level of project efficiency and quality.

The second form is the Award Fee CPFF contract. This type of contract is similar to the Incremental CPFF contract in that it includes a fixed fee, but it also includes an award fee that is paid based on the seller`s performance. The award fee is meant to incentivize the seller to perform at a high level. The higher the level of performance, the higher the award fee paid. This type of contract is preferred by sellers because it allows them to earn additional income for exceptional performance.

Both forms of CPFF contracts are preferred by buyers and sellers for different reasons. The Incremental CPFF contract aligns the seller`s incentives with the buyer`s objectives, which can lead to a more efficient and high-quality project. The Award Fee CPFF contract incentivizes exceptional performance, which can result in additional income for the seller. As such, it is important for buyers and sellers to carefully consider both forms of CPFF contracts before entering into a procurement arrangement.