CPPC (Cost-Plus Percentage of Cost)

What is CPPC (Cost-Plus Percentage of Cost)?

Cost-Plus Percentage of Cost (CPPC) is a cost-reimbursement contract where the contractor is reimbursed for all allowable costs, plus a profit that is a specified percentage of those costs. This contract type is largely prohibited in government contracting due to its inherent lack of incentive for cost control.

Definition

CPPC contracts calculate the contractor's profit as a fixed percentage of the allowable costs incurred while performing the contract. This means that the more costs the contractor incurs (within the definition of 'allowable'), the greater their profit. CPPC contracts are addressed in FAR 16.102(c), which states that unless explicitly authorized by statute, this contract type may not be used. CPPC is rarely used because it creates a perverse incentive for contractors to inflate costs, as their profit margin is directly tied to those expenses.

Key Points

• Inherent Disincentive for Cost Control: The primary drawback of CPPC is the lack of motivation for the contractor to minimize costs. The profit margin increases with spending.
• Legality and Restrictions: CPPC contracts are largely forbidden in U.S. Federal Government contracting due to FAR prohibitions unless specifically authorized by law.
• Alternative Contract Types: Cost-Plus Fixed-Fee (CPFF) and Cost-Plus Incentive-Fee (CPIF) contracts offer preferable alternatives that provide incentives for cost management and performance.
• Audit Scrutiny: Even if a CPPC contract were allowed, expect intense scrutiny of all costs by auditors (such as DCAA) to ensure only necessary and reasonable costs are charged.

Practical Examples

1. Hypothetical (and largely disallowed) Construction Project: A hypothetical government agency awards a construction contract on a CPPC basis. The contractor, instead of seeking cost-effective materials, chooses the most expensive options because their profit is a percentage of the total project cost.
2. Cost Overruns: A hypothetical services contract (again, extremely unlikely) is awarded as CPPC. The contractor staffs more personnel than necessary to complete the work, resulting in excessive labor costs. These higher costs directly translate to a higher profit for the contractor, even if the work is not more efficiently executed.
3. Negotiating Better Alternatives: A contracting officer initially proposes a contract mechanism resembling CPPC due to their inexperience. The contractor educates the contracting officer about the FAR prohibition and suggests a CPFF or CPIF structure that aligns incentives better and complies with regulations.