Certified Supply Chain Professional (CSCP) Practice Exam

Which statement best describes a cost plus incentive fee contract?

1. The seller bears the costs and receives only a fixed amount

2. The seller receives allowable costs plus a profit if conditions are met

3. The seller is paid a set price for their services

4. The seller incurs all risks without additional compensation

The correct answer is: The seller receives allowable costs plus a profit if conditions are met

A cost plus incentive fee contract is designed to provide the seller with reimbursement for allowable costs incurred during a project along with an additional incentive payment if certain performance criteria or conditions are met. This type of contract encourages the seller to control costs efficiently since their total payment is not only based on the actual costs but also includes the potential for a profit contingent upon meeting agreed-upon goals or benchmarks. In this arrangement, the focus is on providing a fair return for the seller while still motivating them to perform well and minimize costs. This dual structure protects both parties: the buyer benefits from the seller’s efficiency, while the seller is assured coverage for their costs plus the chance for profit if they meet or exceed performance expectations. Understanding this type of contract is crucial in supply chain management, as it aligns the interests of both the buyer and seller and fosters collaboration to achieve better outcomes.