Different organizations use different types of contract agreements. The different contract agreements in project management influence the decisions during the plan procurement management process. It is, therefore, important in project management to determine the right contractual agreement to use.
One of the contractual agreement used by most organizations today is the cost-plus contract (cost reimbursement contract). This type of contract gives reimbursements to sellers for the legal actual costs incurred for a particular completed work. This type of contract allows financial incentives based on the defined objectives. It also provides flexibility to the seller whenever there is work that cannot be defined from the start. This type of contract works well for high-risk projects.
One of the types of cost reimbursement contract is the cost plus award free contracts (CPAF). This type of contract involves reimbursing the seller for all the legal costs that he or she has incurred. However, majority of the fee earned is based on the satisfying the subjective performance criteria stipulated in the contract. The fee is determined based on the buyer’s subjective assessment of the seller’s performance
The fee earned in the cost plus award free contracts (CPAF) will be commensurate with the buyer’s overall schedule, cost, and technical performance as well as in accordance with the criteria of the award-free plan. This means that the buyer will not be paid if the performance is below satisfactory.
This type of contractual agreement is very flexible and the contractor usually delivers better product and service. It also promotes a positive relationship between the buyer and seller as good performance is rewarded. On the other hand, this is not a preferred contracting method when regulating organization. It also as higher cost as well as increase the liability compared to traditional fixed-price contract.
This term is defined in the 5th edition of the PMBOK.