Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 2

Pricing Military Contracts The Pentagon is constantly seeking ways to procure the most effective combat equipment and systems at the lowest possible cost. A key element in most procurement contracts is fixed fee based on percentage of full cost for the contract, plus a percentage fixed fee that is incentive based. The latter is based on meeting contract deadlines and meeting or exceeding other contract performance measures. A recent Pentagon contract with Boeing involves a 10 percent fixed fee on cost incurred and another 5-percent-of-incentive award.

Required Evaluate the compensation plan for this contract, with the fixed fee of10 percent and the incen­tive fee of 5 percent. What do you think is the role of the incentive fee, and do you think it is too large or too small?

Step 1 of 2

Compensation plan is providing the full details of the employees in term of the salary, wages, benefits and payment. Detail of the Bonuses, incentives, and commissions which is paid for the employees is also involved in the compensation plan. Health insurance, medical benefits etc. which is received the employees in the place of money is involved in the compensation plan like an indirect income.