What is CPPC (Cost-Plus-Percentage-of-Cost)?
Cost-Plus-Percentage-of-Cost (CPPC) is a type of contract where the contractor is reimbursed for all allowable costs incurred during the execution of a project, plus an additional fee that is calculated as a percentage of these costs. This contract type is generally considered unfavorable for the client because it provides little incentive for the contractor to control costs, as higher costs result in higher fees.
Key Features of CPPC Contracts
- Cost Reimbursement: Under a CPPC contract, the contractor is reimbursed for all legitimate and allowable costs incurred during the project. This includes direct costs like labor and materials, as well as indirect costs.
- Percentage-Based Fee: The contractor’s profit or fee is determined as a fixed percentage of the total costs incurred. This means that the more the contractor spends, the higher their fee will be, potentially leading to less cost control.
- Minimal Cost Control Incentive: Because the contractor’s fee increases with higher costs, there is little financial incentive to minimize expenses. This can lead to inefficiencies and inflated project costs.
- Risk Allocation: CPPC contracts place most of the financial risk on the client, as they are responsible for covering all costs, regardless of how efficiently or inefficiently the contractor manages the project.
- Regulatory Restrictions: Due to the potential for cost overruns and inefficiencies, CPPC contracts are generally discouraged or prohibited in many government procurement regulations.
Importance and Challenges of CPPC Contracts
CPPC contracts are rarely used in modern procurement, particularly in government contracting, due to their inherent inefficiencies and lack of cost control incentives. They can lead to significant cost overruns and are not aligned with best practices in contract management, which emphasize efficiency, accountability, and value for money.
