16.403-2
Fixed-price incentive (successive targets) contracts
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.