16.204
Fixed-price incentive contracts
Fixed-price incentive contracts motivate contractors to control costs by adjusting profit and final price based on actual versus target costs, requiring careful contract structuring and compliance with prescribed clauses.
Overview
FAR 16.204 defines fixed-price incentive contracts as a type of fixed-price contract that allows for profit adjustment and final price determination based on a formula tied to the relationship between final negotiated costs and target costs. This contract type is designed to motivate contractors to control costs and improve performance by sharing cost savings or overruns. The section references Subpart 16.4 for detailed rules and 16.403 for specific applications and limitations, as well as 16.406 for required contract clauses. Fixed-price incentive contracts are typically used when there is some uncertainty in contract performance, but not enough to justify a cost-reimbursement contract.
Key Rules
- Definition of Fixed-Price Incentive Contracts
- These contracts allow for profit adjustment and final price determination based on actual versus target costs.
- Reference to Detailed Guidance
- For comprehensive rules, applications, and limitations, refer to FAR 16.403 and Subpart 16.4.
- Prescribed Clauses
- Required contract clauses for these contracts are found in FAR 16.406.
Responsibilities
- Contracting Officers: Must determine when a fixed-price incentive contract is appropriate, apply the correct formula, and include required clauses.
- Contractors: Must understand the incentive structure and manage costs to maximize profit potential.
- Agencies: Should ensure proper contract type selection and oversight of incentive mechanisms.
Practical Implications
- This section exists to provide a flexible contract type that encourages cost control and performance improvement.
- It impacts daily contracting by requiring careful cost estimation and monitoring.
- Common pitfalls include misunderstanding the incentive formula or failing to include required clauses.