Definition
A Cost-Plus-Award-Fee (CPAF) contract is a type of cost reimbursement contract where the government pays the contractor back for all allowable costs, plus a fee that has two parts: a base fee (which may be zero) that is fixed upfront, and an award fee that is earned based on the government's subjective evaluation of how well the contractor performed.
In simple terms: the government covers your costs, and your bonus depends on how impressed they are with your work, not just whether you hit a cost target.
The Simple Explanation
Imagine the Department of Energy hires an engineering firm to manage a complex nuclear cleanup project. The work involves multiple shifting priorities, safety requirements, community relations, and technical challenges that are nearly impossible to reduce to a single measurable metric. A fixed price contract is out of the question. Even CPIF, which ties the fee to cost performance, misses the point: cost control is important, but so is safety, quality, responsiveness, and how well the contractor communicates with the agency.
So the government uses a CPAF contract. The contractor is reimbursed for all approved costs. Then, at the end of each evaluation period, typically every six months or annually, a government panel reviews the contractor's overall performance and awards a fee based on how well they did across a range of qualitative and quantitative criteria. Perform exceptionally well and earn the full award fee. Perform below expectations and earn little or nothing.
Key Characteristics of a CPAF Contract
- All allowable costs are reimbursed: Labor, materials, overhead, subcontractors, and any cost that meets FAR Part 31 standards is reimbursed.
- Base fee (optional): A small fixed fee, typically up to 3%, that may be paid regardless of performance. Many CPAF contracts set the base fee at zero.
- Award fee pool: The total available award fee is established upfront. The contractor can earn anywhere from 0% to 100% of this pool depending on performance evaluations.
- Subjective evaluation: Unlike CPIF, where the fee adjustment is calculated by a formula, the CPAF award fee is determined by the government's judgment. It is a qualitative assessment, not a mathematical one.
- Fee Determining Official (FDO): The government designates a specific official, the FDO, who makes the final, unilateral decision on how much award fee the contractor earns. This decision is generally not subject to dispute.
- Evaluation periods: Performance is assessed in regular intervals, typically quarterly, semi-annually, or annually. The fee is awarded at the end of each period.
- No rollover of unearned fee: Under FAR and DoD guidance, unearned award fee from one period generally cannot be carried over to future periods.
- Governed by FAR 16.401(e) and FAR 16.305.
How the Award Fee Process Works
- At contract award, the government establishes an Award Fee Plan, a document outlining the evaluation criteria, weighting, rating scale, and schedule for periodic assessments.
- During each evaluation period, a government Award Fee Board monitors the contractor's performance against the criteria in the plan.
- At the end of each period, the board prepares a performance assessment and recommends a fee amount.
- The Fee Determining Official (FDO) reviews the recommendation and makes a final, unilateral decision on the award fee amount.
- The contractor is notified of the fee earned and receives feedback on performance, which informs how they should adjust their approach in the next period.
Common evaluation criteria include:
- Technical performance and quality of deliverables
- Schedule adherence and responsiveness
- Cost control and financial management
- Safety record and compliance
- Management effectiveness and communication
- Innovation and problem-solving
Real-Life Government Contract Example
One of the most well-known CPAF contracts in the federal government is NASA's contract with the California Institute of Technology (Caltech) for the operation and management of the Jet Propulsion Laboratory (JPL) in Pasadena, California.
Since 1993, NASA has used CPAF contracts to govern Caltech's management of JPL, one of the world's leading space research and development centers. The CPAF structure was chosen because JPL's work spans hundreds of simultaneous programs, from Mars rovers and deep space telescopes to earth sciences and technology development, making it impossible to set objective cost or performance targets for the entire operation under a simpler contract type.
An earlier iteration of the contract, awarded in 1997, had an estimated total value of $6.25 billion at approximately $1.25 billion per year, with award fees tied to NASA's evaluation of Caltech's performance across technical, schedule, cost, and management dimensions. A subsequent five-year CPAF contract awarded in November 2002 was valued at approximately $7.5 billion, with $22 million in available award fees per year.
JPL's work under these CPAF contracts has included missions such as the Mars Exploration Rovers Spirit and Opportunity, the Spitzer Space Telescope, and the Cassini mission to Saturn. (Source: GAO-07-58 and SpaceRef)
When Is a CPAF Contract the Right Choice?
CPAF contracts are appropriate when:
- The work is complex, long-term, and difficult to define with specific measurable targets
- Subjective performance factors, like quality, communication, and management excellence, are as important as cost control
- The government wants to motivate the contractor to perform beyond the minimum required
- The scope involves multiple simultaneous programs, where a single fee formula would be impractical
- The agency has the administrative capacity to run a formal award fee evaluation process
They are generally not suitable when:
- Clear, objective performance metrics can be established (use CPIF instead)
- The contract value is too small to justify the administrative burden of running an award fee process (FAR guidance discourages CPAF for contracts under $2 million per year)
- The government lacks sufficient staff to properly monitor and evaluate contractor performance
Pros and Cons: A Vendor's Perspective
Pros
- Performance is holistically rewarded: CPAF recognizes qualitative excellence, things like strong communication, proactive problem-solving, and superior management, that objective formulas cannot capture.
- Low financial risk: All allowable costs are reimbursed. The award fee is additional, not replacing, your cost recovery.
- Ongoing feedback loop: Regular evaluation periods with written feedback help you understand exactly how the government views your performance and where to improve.
- Access to large, prestigious programs: CPAF contracts are often used for flagship government programs, NASA missions, DOE facilities management, major defense programs, giving vendors access to high-profile, long-term work.
Cons
- Fee is at the government's discretion: The FDO's decision on award fee is unilateral and generally not subject to challenge. Even strong performance may not result in a full award fee if the government's subjective assessment differs from yours.
- Heavy administrative burden: Preparing performance data, participating in evaluations, and responding to government feedback requires significant internal resources.
- No guaranteed upside: Unlike CPIF, where the formula guarantees a higher fee for cost savings, CPAF offers no such certainty. Excellent cost performance alone may not translate into maximum award fee.
- Requires DCAA-compliant accounting: Like all cost-type contracts, CPAF requires a government-approved accounting system and subjects your incurred costs to audit.
CPAF vs. Other Cost-Type Contracts
Key Statistics
- CPAF contracts accounted for approximately 40% of all cost-plus contract dollars obligated by the Department of Defense in fiscal year 2005, making it one of the most frequently used incentive contract types in federal procurement. (Source: GAO-09-630)
- NASA relied heavily on CPAF contracts, which accounted for 48% of obligated contract dollars and 7.7% of contract actions from fiscal years 2002 through 2004. (Source: GAO-07-58)
- The Department of Energy established CPAF contracts as the generally appropriate contract type for its management and operations contracts, which cover major national laboratory facilities. (Source: GAO-09-630)
Common Terms Associated with CPAF Contracts
CPAF Contracts in the SLED Market: What Vendors Should Know
CPAF contracts are rare in the standard SLED procurement environment. Most state and local agencies lack the administrative infrastructure, trained evaluators, formal award fee boards, and structured evaluation plans needed to run a proper CPAF process. They also tend to prefer simpler contract structures that require less ongoing oversight.
However, CPAF-style performance evaluation structures do appear in the SLED market in specific contexts:
- Large state facilities management contracts: Some state governments managing complex multi-site facilities, correctional facilities, state hospital systems, and university campuses use performance-based fee arrangements that share characteristics with CPAF.
- Federal pass-through programs: When federal agencies fund state-administered programs and require contractor accountability beyond simple cost tracking, CPAF-like performance evaluation requirements may flow down.
- Public-private partnership (P3) agreements: Some P3 arrangements for infrastructure or service delivery include performance-linked fee components similar to CPAF, rewarding exceptional service quality with bonus payments.
For SLED vendors with aspirations to grow into federal contracting, particularly with NASA, DoD, or DOE, understanding CPAF is essential. These agencies use it extensively for their most complex, high-value, long-term programs.
Quick Summary
A CPAF contract reimburses all allowable costs and adds an award fee that is earned, or not, based on the government's subjective evaluation of the contractor's overall performance. The fee is determined by a Fee Determining Official whose decision is final and generally cannot be appealed. CPAF is the preferred contract type when performance quality matters as much as cost control, and when the complexity of the work makes objective incentive formulas impractical. It is widely used by NASA, DoD, and the Department of Energy for flagship programs. For vendors, it offers low financial risk and holistic performance recognition, but requires strong relationship management, meticulous documentation, and acceptance that your fee is ultimately in the government's hands.
