Tài liệu tiếng Anh thương mại quản lý Chapter 15 Methods of compensation

Tài liệu tiếng Anh thương mại quản lý Chapter 15 Methods of compensation

Chapter 15

Methods of Compensation

Key Concepts

• Contract cost risk appraisal

agreements

Key Concepts

» Firm fixed price contracts

» Fixed price with economic adjustment contracts

» Fixed price redetermination contracts

» Incentive arrangements

» Cost plus incentive fee arrangements

» Cost plus fixed fee arrangements

» Cost plus award fee

» Cost without fee

» Cost sharing

» Time and materials

» Letter contracts and letters of intent

Introduction to Compensation Agreements

determines:

assumed by the supplier

supplier

the compensation arrangements

Example 1: Low Level of Uncertainty

Example 2: High Level of Uncertainty

Example 2: Continued

• Most sellers are unwilling to large risks

at $1,100,000 due to this additional uncertainty

• In this case, the seller studies the

distribution of likely cost outcomes and

concludes that, 9 times out of 10, the

actual cost will be $1,400,000 or less

• Based on the risk aversion, the seller may demand a firm fixed price of $1,540,000

this cost)

contract

Contract Cost Risk Appraisal

– Type and complexity of the item or service

– Stability of design specifications or statement of work

– Availability of historical pricing data

– Prior production experience

» Anticipate material and labor cost increases

– Forward pricing is common

» Anticipate possible schedule slippages

General Types of Contract Compensation

Cost

Type

Contracts Incentive Contracts

Firm Fixed Price Contracts

• A firm fixed price (FFP) contract is an

agreement to pay a specified price when

the items (services) specified by the

contract have been delivered (completed) and accepted

When to Use FFP

• Specifications are well defined

• Cost risk is low

• Schedule risk is low

• Technical risk is low

Firm Fixed Price Contract Example

Figure 19-3

Reasons Why Firm Fixed Price Contracts Do Not

Always Remained Fixed

relief if:

– Assumes other suppliers are not available

sound supply management practices

Fixed Price and Economic Price Adjustment Contracts (FPEPA)

• (FPEPA) contracts are used to recognize

economic contingencies, such as unstable labor or market conditions

• FPEPA is an FFP contract that includes

economic price adjustment clauses

Rules for Selecting Indexes for Price Adjustment

actual price change of the item being indexed

Fixed Price Redetermination Contracts (FPR)

• A FFP is set for an initial contract period

occurs at a stated time during the contract

» Occurs at a stated time during the contract

» Used where a fair and reasonable price can be developed for initial periods but not subsequent periods

• FPR retroactive

» Occurs at the end of the contract

» Used when uncertainty exists as in the prospective, but the amount of the contract is small and/or the

performance period is short

Incentive Arrangements

• Used to motivate the supplier to:

• Contract price will usually be higher

• Ceiling price is usually fixed during

negotiations

• Cost responsibility is shared

Elements of a Simplified Incentive Contract

• Target cost

the most likely outcome

• Target profit

• Allocating costs above or below target

met

reflects the sharing of the cost responsibility

Fixed Price Incentive Fee Example

Cost Plus Incentive Fee Arrangements

the cost plus fixed fee arrangement

• Under a CPIF arrangement, an incentive

applies over part of the range of cost

outcomes

• The fee structure resembles a cost plus

fixed fee contract at both the low-cost and high-cost ends of the range

Cost Plus Incentive Fee Example

• Sharing below target (customer/supplier) = 75/25

• Sharing above target (cust./supplier) =

CPIF Contract Example Continued

Cost Plus Incentive Fee Arrangements

• Cost savings = target cost - final cost

• Supplier’s share of cost savings = cost

savings × supplier share

• Computed fee = savings fee + target fee

• Final price = final cost + maximum fee

Cost Plus Incentive Fee Example

Cost-type Arrangements

» Research and development increases technical risk

» Project completion is in doubt

» Product specifications are incomplete

» High-dollar, highly uncertain procurements are involved

» Cost reimbursement

» Cost plus fixed fee

» Cost plus award fee

» Cost without fee

» Cost sharing

» Time and materials

Cost Plus Fixed Fee Arrangements (CPFF)

• Buying firm pays a fixed fee and all costs beyond fee

• Fee is for specified scope of work

• Supplier has no incentive to control costs

• Characterized by low supplier profit

• A total liability limit is usually established

Optimistic Most likely Pessimistic

Final cost $800 $1,000 $1,200 Fixed fee 50 50

50

CPFF Example

(not in text)

Cost Plus Award Fee (CPAF)

• The award fee is a pool of money

established by the buyer to reward the

supplier in meeting the buyer’s stated

needs

• Receipt of the fee is based on the buying

firm’s subjective evaluation

• CPAF works as a flexible tool

Cost Without Fee

• Used primarily by nonprofit institutions

• Used for research work without the

objective of making a profit

• Institutions recover all overhead costs

• In recent years, high-technology firms

have increased their use of this contract

type

Cost Sharing

• In some situations, a firm doing research

under a cost type of contract stands to

benefit if the product developed can be

used in its own product line

the seller agree on what they consider to

be a fair basis to share the costs (most

often it is 50-50)

• The electronics industry has found this

type of contract especially useful

Considerations When Selecting Contract Types

» Which may require additional resources to meet deadlines

Concluding Remarks

methods presented will significantly

reduce expenditures when cost risk is

present

a reasonable allocation of the cost risk

motivation to the supplier to assure

effective performance

END