16.404 Fixed-price contracts with award fees
Source: FAR 16.404 on acquisition.gov
Fixed-price contracts with award fees allow the Government to incentivize contractor performance when objective measures are not possible, but require a set fixed price and compliance with additional requirements in FAR 16.401(e).
Overview
FAR 16.404 addresses the use of fixed-price contracts with award fee provisions. These contracts are appropriate when the Government wants to incentivize contractor performance but cannot use objective performance measures for other incentive types. The contract must specify a fixed price, which includes normal profit, and this amount is paid for satisfactory performance. Any award fee earned is paid in addition to the fixed price. The section also references FAR 16.401(e) for additional requirements related to this contract type.
Key Rules
- Use of Award-Fee Provisions
- Award-fee provisions are permitted in fixed-price contracts when performance cannot be measured objectively and other incentives are not suitable.
- Fixed Price Requirement
- The contract must establish a fixed price, including normal profit, which is paid for satisfactory performance.
- Award Fee Payment
- Any award fee earned is paid on top of the fixed price, based on the contractor’s performance.
- Reference to Additional Requirements
- Contracting professionals must consult FAR 16.401(e) for further requirements on using this contract type.
Responsibilities
- Contracting Officers: Must determine when award-fee provisions are appropriate, ensure the contract includes a fixed price, and reference FAR 16.401(e).
- Contractors: Must understand that the fixed price is guaranteed for satisfactory performance, with the potential for additional award fee based on performance.
- Agencies: Should ensure oversight of award-fee determinations and compliance with referenced requirements.
Practical Implications
- This section provides flexibility to incentivize contractors when objective performance metrics are not feasible.
- It ensures contractors are motivated by the possibility of earning an additional award fee.
- Common pitfalls include failing to justify the use of award-fee provisions or not properly referencing FAR 16.401(e).
Award-fee provisions may be used in fixed-price contracts when the Government wishes to motivate a contractor and other incentives cannot be used because contractor performance cannot be measured objectively. Such contracts shall establish a fixed price (including normal profit) for the effort. This price will be paid for satisfactory contract performance. Award fee earned (if any) will be paid in addition to that fixed price. See 16.401(e) for the requirements relative to utilizing this contract type.