16.402-4 Structuring multiple-incentive contracts
Source: FAR 16.402-4 on acquisition.gov
Multiple-incentive contracts must balance incentives across cost, technical, and delivery goals, always including a cost incentive to prevent excessive spending for marginal performance gains.
Overview
FAR 16.402-4 addresses how to structure contracts that include multiple incentive elements, such as cost, technical performance, and delivery. The regulation emphasizes that these contracts should motivate contractors to excel in all incentivized areas, not just one. It also requires that the contract structure compels contractors to make trade-offs among incentive areas in line with the Government’s overall acquisition objectives. Importantly, every multiple-incentive contract must include a cost incentive (or constraint) to ensure that superior performance in technical or delivery areas does not result in excessive costs that outweigh the benefits to the Government. This prevents the contractor from being rewarded for performance that is not cost-effective.
A properly structured multiple-incentive arrangement should-
(a) Motivate the contractor to strive for outstanding results in all incentive areas; and
(b) Compel trade-off decisions among the incentive areas, consistent with the Government’s overall objectives for the acquisition. Because of the interdependency of the Government’s cost, the technical performance, and the delivery goals, a contract that emphasizes only one of the goals may jeopardize control over the others. Because outstanding results may not be attainable for each of the incentive areas, all multiple-incentive contracts must include a cost incentive (or constraint) that operates to preclude rewarding a contractor for superior technical performance or delivery results when the cost of those results outweighs their value to the Government.