International Project Management Association (IPMA) Practice Exam

Which of the following best describes a Cost-Plus-Incentive-Fee contract?

1. Fixed price with no incentives

2. Cost reimbursement with a fixed fee

3. Cost reimbursement with incentives based on performance

4. Fixed price with variable fees

The correct answer is: Cost reimbursement with incentives based on performance

A Cost-Plus-Incentive-Fee contract is designed to reimburse the contractor for their allowable costs while also providing an incentive for them to control their costs and perform efficiently. In this type of contract, the contractor receives payment for all costs incurred during the project, plus an additional incentive fee that is based on the relationship between the actual costs and the target costs set in the contract. This structure encourages the contractor to keep costs down, as their fee increases when they are able to minimize expenses while still delivering quality results. The aim is to align the interests of the contractor and the client, fostering a cooperative relationship and promoting cost-effective project management. In contrast, the other options do not encompass the incentive aspect that is central to the Cost-Plus-Incentive-Fee contract. A fixed price with no incentives lacks the cost reimbursement element, while a cost reimbursement with a fixed fee does not offer incentives tied to performance, making them fundamentally different from the scenario described.