Optimization of Cost Plus Incentive Fee Contract in Equipment Acquisition Considering Cost Revelation

Currently, the cost plus incentive fee contract is commonly used in the field of equipment acquisition while it has some limitations. It may cause supplier to overstate cost to increase profits, and ultimately reduce efficiency in the use of funds. To motivate supplier to tell its actual costs, the model optimizes the cost plus incentive fee contract and proposes that the target cost be set by the supplier rather than the customer. Correspondingly, target profit and incentive coefficient are set based on the target cost set by the supplier. The optimization model gives the specific function of target profit and incentive coefficient on target cost, and limits the range of profits by setting the upper limit and the specific value at the most likely cost of profit rate. In theory and case, it is demonstrated that the supplier benefits the most when telling its actual cost, and the contract can achieve the optimal incentive effect.