How Do You Calculate The Range Of Incentive Effectiveness?
As project manager managing “cost plus incentive fee” contracts, you specify a minimum fee and a maximum fee as well as a target fee. The values between these points are called the “range of incentive effectiveness” which helps you determine at which point the arrangement affects the fee. The price paid by you (the buyer) to your contractor (the seller) changes depending on costs, with the intent to reduce the risks assumed by your contractor (the seller). Pay your seller the target costs plus a fee and a variable amount. Balance the risk between you and your contractor as you set up your contract. Providing your contractor with the opportunity to earn additional money motivates him to improve performance, contain costs and ensure milestones are met. Determine the variable amount to pay your seller. Subtract the target costs from actual costs and then multiply the difference by your (the buyer) ratio. If your target costs are $10,000, the fee is $100, your buyer ratio is 80/20 and the
