A contractor is working under a Cost-Plus-Fixed-Fee contract with a $2,500,000 estimated cost and a $200,000 fixed fee. If actual costs are $2,750,000, what is the contractor's total compensation?
Correct Answer
D) $2,950,000
In a Cost-Plus-Fixed-Fee contract, the contractor receives reimbursement for all allowable costs plus the fixed fee regardless of actual costs. Total compensation = $2,750,000 (actual costs) + $200,000 (fixed fee) = $2,950,000.
Why This Is the Correct Answer
$2,950,000 is correct. In a Cost-Plus-Fixed-Fee (CPFF) contract, the contractor is reimbursed for all allowable actual costs plus a pre-negotiated fixed fee that does not change regardless of actual costs. Total = $2,750,000 (actual costs) + $200,000 (fixed fee) = $2,950,000.
Why the Other Options Are Wrong
Option A: $2,500,000
$2,500,000 is incorrect — this is the original estimated cost only, with no fee included. Under a CPFF contract, the contractor receives reimbursement for actual costs, not estimated costs, plus the fixed fee.
Option B: $2,750,000
$2,750,000 is incorrect — this is the actual cost only, without adding the fixed fee. The contractor is always entitled to the fixed fee in addition to cost reimbursement, regardless of whether costs exceeded the estimate.
Option C: $2,700,000
$2,700,000 is incorrect — this appears to be the estimated cost plus the fixed fee ($2,500,000 + $200,000), ignoring the fact that actual costs ($2,750,000) exceeded the estimate. The contractor is reimbursed for actual costs, not estimated costs.
Memory Technique
CPFF = Actual Costs + Fixed Fee. The fee is 'fixed' — it stays at $200,000 no matter what. The cost portion uses ACTUAL, not estimated. Actual ($2.75M) + Fixed ($0.2M) = $2.95M.
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