16.403
Fixed-price incentive contracts
Fixed-price incentive contracts motivate contractors to control costs and meet performance goals by tying profit and final price to actual versus target costs, within a negotiated ceiling.
Overview
- FAR 16.403 defines fixed-price incentive contracts, which are fixed-price agreements that allow for profit adjustment and final price determination based on a formula tied to actual costs versus target costs. These contracts include a negotiated price ceiling and are designed to motivate contractors to control costs and meet performance goals.
Key Rules
- Description of Fixed-Price Incentive Contracts
- These contracts use a formula to adjust profit and establish the final price, with a ceiling price set at the start. There are two types: firm target and successive targets.
- Appropriate Use Cases
- Use when a firm-fixed-price contract is not suitable, when contractor cost responsibility will incentivize performance, and when technical or delivery incentives can meaningfully impact contractor management.
- Billing Prices
- Interim billing prices are set and may be adjusted (within the ceiling) if actual costs are expected to differ significantly from the target cost, upon request by either party.
Responsibilities
- Contracting Officers: Must determine suitability, negotiate target costs and ceiling, and manage billing price adjustments.
- Contractors: Must manage costs and performance to maximize profit under the incentive structure, and request billing price adjustments if needed.
- Agencies: Oversee contract administration and ensure incentives are structured to achieve desired outcomes.
Practical Implications
- This section ensures contracts are structured to motivate cost control and performance when firm-fixed-price contracts are not feasible. Contractors must understand the incentive formula and manage costs carefully. Misestimating costs or failing to monitor performance can reduce profit or lead to losses.