Dictionary of Procurement Terms

The sum of all direct costs associated with producing a good (e.g., raw materials and direct labor costs).

A cost reimbursement contract that provides for a base fee amount fixed at the inception of a contract. A CPAF also includes an additional fee to be determined at the time of award that is based on an evaluation by the purchaser regarding the quality of the contract performance and the evaluator’s assessment regarding the fee amount necessary to motivate the contractor toward excellence.

A contract that provides for the contractor to be reimbursed for all incurred costs related to their performance of the contract, plus a predetermined fixed amount.

A contract whereby the contractor receives additional compensation for keeping the total amount expended below the agreed-upon maximum contract amount, or for achieving certain pre-specified goals during the performance of the contract.

An agreement in which the contractor is provided a specified percentage profit over and above the actual costs. This pricing method is generally prohibited, or at least discouraged, because it provides an incentive for the contractor to increase, rather than decrease, costs.

Regulatory principle used to determine the allowability of incurred costs for the purpose of reimbursement under the provisions of the contract.

A factor considered during cost analysis of a proposal to determine if the costs proposed are realistic in light of historical experience, costs on similar projects, market conditions over the life of the proposal, or other factors.

A reduction generally realized when a manufacturer is able to lower the material or labor costs used to make its products; interchangeably used to indicate a lower price paid by the buyer from what was previously paid. See also: Cost Saving, Price Reduction.

A realized and measurable reduction in material, resource, or labor expense(s) associated with the production and delivery of an item or service. Primarily associated in the manufacturing of an item; interchangeably used to indicate a lower price paid by the buyer from what was previously paid. See also: Price Reduction, Cost Reduction.

A type of contract that is used when it is impossible to firmly estimate costs and there is a high probability that the contractor will receive a substantial current or future commercial benefit. This type of contract may be used in research and development areas, as well as public-private partnerships.