A Cost-Plus-Award-Fee (CPAF) Contract is a contract type where the seller is reimbursed for all legitimate actual costs incurred for completed work, plus an award fee representing seller profit. The award fee is determined based on performance criteria set by the buyer.
Key Aspects of a CPAF Contract
- Covers Actual Costs – The seller is reimbursed for all allowable project expenses.
- Includes an Award Fee – The seller earns a profit based on performance evaluation.
- Encourages High Performance – The award fee is tied to meeting or exceeding specific goals.
- Used in Government & R&D Contracts – Common in projects with uncertain scope or evolving requirements.
CPAF vs. Other Cost-Reimbursable Contracts
| Contract Type | Description |
|---|---|
| Cost-Plus-Award-Fee (CPAF) | Covers actual costs plus an award fee based on performance. |
| Cost-Plus-Fixed-Fee (CPFF) | Covers actual costs plus a fixed profit fee, regardless of performance. |
| Cost-Plus-Incentive-Fee (CPIF) | Covers actual costs plus an incentive fee based on cost savings or efficiency. |
Example Scenarios
Aerospace & Defense
A government agency awards a CPAF contract to a defense contractor for developing a new satellite system, with an award fee tied to meeting technical milestones.
Research & Development
A pharmaceutical company contracts a research firm under a CPAF agreement to develop a new vaccine, with an award fee based on successful clinical trial results.
IT & Software Development
A government IT project uses a CPAF contract for a cybersecurity system, rewarding the seller for on-time delivery and system reliability.
Why CPAF Contracts Matter
- Encourages High-Quality Work – Sellers are motivated to exceed expectations.
- Provides Cost Transparency – Buyers can track actual expenses.
- Allows Flexibility in Uncertain Projects – Useful for R&D and innovation-driven initiatives.
- Balances Risk Between Buyer & Seller – Sellers are guaranteed cost recovery while buyers control the award fee.
See also: Contract Types, Procurement Management Plan, Fixed-Price Contracts, Risk Sharing in Contracts.