16.403-2 Fixed-price incentive (successive targets) contracts
Source: FAR 16.403-2 on acquisition.gov
Fixed-price incentive (successive targets) contracts allow for initial cost and profit targets with later adjustments, incentivizing cost control while accommodating evolving cost information.
Overview
- FAR 16.403-2 covers Fixed-Price Incentive (Successive Targets) Contracts, a contract type used when initial cost and profit targets can be set, but more accurate pricing will be possible as performance progresses. This contract structure is designed to incentivize cost control while allowing for price adjustments as more information becomes available.
Key Rules
- Contract Elements
- At award, the contract must specify initial target cost, initial target profit, a profit adjustment formula (with ceiling and floor), the production point for renegotiation, and a ceiling price.
- Negotiation at Production Point
- When the specified production point is reached, parties renegotiate firm target cost and profit based on actual cost experience, and may either set a firm fixed price or establish a formula for final price determination.
- Appropriate Use
- This contract type is suitable when initial targets can be set but a realistic firm target cost and profit cannot be determined before award, and when reliable cost/pricing data will become available early in performance.
- Limitations
- The contractor must have an adequate accounting system and cost/pricing data must be expected early in performance.
- Contract Schedule Requirements
- The contract schedule must list the initial target cost, profit, and price for each item subject to incentive revision.
Responsibilities
- Contracting Officers: Must ensure all required elements are negotiated and documented, verify contractor’s accounting system adequacy, and specify all targets in the contract schedule.
- Contractors: Must maintain an adequate accounting system and provide necessary cost/pricing data for negotiations.
- Agencies: Oversee compliance with contract structure and ensure proper use of this contract type.
Practical Implications
- This section enables flexible pricing for complex procurements where costs are uncertain at award but will become clearer during performance. It helps balance risk and incentivize cost control, but requires robust accounting and timely data sharing. Common pitfalls include inadequate cost data or failure to renegotiate targets as required.
(a) Description.
(1) A fixed-price incentive (successive targets) contract specifies the following elements, all of which are negotiated at the outset:
(i) An initial target cost.
(ii) An initial target profit.
(iii) An initial profit adjustment formula to be used for establishing the firm target profit, including a ceiling and floor for the firm target profit. (This formula normally provides for a lesser degree of contractor cost responsibility than would a formula for establishing final profit and price.)
(iv) The production point at which the firm target cost and firm target profit will be negotiated (usually before delivery or shop completion of the first item).
(v) A ceiling price that is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.
(2) When the production point specified in the contract is reached, the parties negotiate the firm target cost, giving consideration to cost experience under the contract and other pertinent factors. The firm target profit is established by the formula. At this point, the parties have two alternatives, as follows:
(i) They may negotiate a firm fixed price, using the firm target cost plus the firm target profit as a guide.
(ii) If negotiation of a firm fixed price is inappropriate, they may negotiate a formula for establishing the final price using the firm target cost and firm target profit. The final cost is then negotiated at completion, and the final profit is established by formula, as under the fixed-price incentive (firm target) contract (see 16.403-1 above).
(b) Application. A fixed-price incentive (successive targets) contract is appropriate when-
(1) Available cost or pricing information is not sufficient to permit the negotiation of a realistic firm target cost and profit before award;
(2) Sufficient information is available to permit negotiation of initial targets; and
(3) There is reasonable assurance that additional reliable information will be available at an early point in the contract performance so as to permit negotiation of either (i)a firm fixed price or (ii) firm targets and a formula for establishing final profit and price that will provide a fair and reasonable incentive. This additional information is not limited to experience under the contract, itself, but may be drawn from other contracts for the same or similar items.
(c) Limitations. This contract type may be used only when-
(1) The contractor’s accounting system is adequate for providing data for negotiating firm targets and a realistic profit adjustment formula, as well as later negotiation of final costs; and
(2) Cost or pricing information adequate for establishing a reasonable firm target cost is reasonably expected to be available at an early point in contract performance.
(d) Contract schedule. The contracting officer shall specify in the contract schedule the initial target cost, initial target profit, and initial target price for each item subject to incentive price revision.