52.216-10 Incentive Fee
Source: FAR 52.216-10 on acquisition.gov
FAR 52.216-10 ties contractor incentive fees directly to cost performance, with strict rules for fee calculation, withholding, and required documentation to ensure government interests are protected.
Overview
FAR 52.216-10, Incentive Fee, establishes the rules for determining and paying incentive fees under cost-plus-incentive-fee (CPIF) contracts. The clause outlines how the target cost and target fee are set and adjusted, the process for withholding and releasing portions of the fee, and the calculation of the final fee based on actual costs versus target costs. It also details circumstances under which equitable adjustments are made, exceptions to allowable costs for fee calculation, and the procedures for contract modification and resolving inconsistencies. The clause is designed to motivate contractors to control costs and improve performance by linking fee payments to cost outcomes.
Key Rules
- Target Cost and Fee Adjustments
- Target cost and fee are set at contract award and may be adjusted for contract modifications or equitable adjustments.
- Withholding of Fee
- The Government may withhold up to 15% or $100,000 of the incentive fee to protect its interests, with partial release upon submission of required final cost proposals and reports.
- Fee Calculation
- The final fee is adjusted up or down based on actual allowable costs compared to the target cost, within specified minimum and maximum limits.
- Exclusions from Allowable Costs
- Certain costs (e.g., excusable delays, new taxes, litigation, additional insurance, indemnified risks) are excluded from the fee adjustment calculation.
- Contract Modification
- Adjusted costs and fees must be documented in a contract modification signed by both parties.
- Resolution of Inconsistencies
- This clause governs in case of inconsistencies with provisioning documents or options.
Responsibilities
- Contracting Officers: Set and adjust target costs/fees, withhold/release fees, approve equitable adjustments, and execute contract modifications.
- Contractors: Submit certified final indirect cost rate proposals, final patent and royalty reports, and comply with all contract terms to receive withheld fees.
- Agencies: Ensure oversight of fee calculations, withholdings, and equitable adjustments.
Practical Implications
- This clause incentivizes contractors to control costs and improve efficiency by tying fee payments to cost performance.
- Contractors must maintain accurate cost records and timely submit required documentation to avoid delays in fee payments.
- Misunderstanding allowable cost exclusions or failing to meet reporting requirements can result in reduced or withheld fees.
As prescribed in 16.307(d), insert the following clause:
Incentive Fee (Jun 2011)
(a) General. The Government shall pay the Contractor for performing this contract a fee determined as provided in this contract.
(b) Target cost and target fee. The target cost and target fee specified in the Schedule are subject to adjustment if the contract is modified in accordance with paragraph (d) of this clause.
(1) "Target cost," as used in this contract, means the estimated cost of this contract as initially negotiated, adjusted in accordance with paragraph (d) of this clause.
(2) "Target fee," as used in this contract, means the fee initially negotiated on the assumption that this contract would be performed for a cost equal to the estimated cost initially negotiated, adjusted in accordance with paragraph (d) of this clause.
(c) Withholding of payment.
(1) Normally, the Government shall pay the fee to the Contractor as specified in the Schedule. However, when the Contracting Officer considers that performance or cost indicates that the Contractor will not achieve target, the Government shall pay on the basis of an appropriate lesser fee. When the Contractor demonstrates that performance or cost clearly indicates that the Contractor will earn a fee significantly above the target fee, the Government may, at the sole discretion of the Contracting Officer, pay on the basis of an appropriate higher fee.
(2) Payment of the incentive fee shall be made as specified in the Schedule; provided that the Contracting Officer withholds a reserve not to exceed 15 percent of the total incentive fee or $100,000, whichever is less, to protect the Government’s interest. The Contracting Officer shall release 75 percent of all fee withholds under this contract after receipt of an adequate certified final indirect cost rate proposal covering the year of physical completion of this contract, provided the Contractor has satisfied all other contract terms and conditions, including the submission of the final patent and royalty reports, and is not delinquent in submitting final vouchers on prior years’ settlements. The Contracting Officer may release up to 90 percent of the fee withholds under this contract based on the Contractor’s past performance related to the submission and settlement of final indirect cost rate proposals.
(d) Equitable adjustments. When the work under this contract is increased or decreased by a modification to this contract or when any equitable adjustment in the target cost is authorized under any other clause, equitable adjustments in the target cost, target fee, minimum fee, and maximum fee, as appropriate, shall be stated in a supplemental agreement to this contract.
(e) Fee payable.
(1) The fee payable under this contract shall be the target fee increased by _____ [Contracting Officer insert Contractor’s participation] cents for every dollar that the total allowable cost is less than the target cost or decreased by ______ [Contracting Officer insert Contractor’s participation] cents for every dollar that the total allowable cost exceeds the target cost. In no event shall the fee be greater than ____________ [Contracting Officer insert percentage] percent or less than _________________ [Contracting Officer insert percentage] percent of the target cost.
(2) The fee shall be subject to adjustment, to the extent provided in paragraph (d) of this clause, and within the minimum and maximum fee limitations in paragraph (e)(1) of this clause, when the total allowable cost is increased or decreased as a consequence of-
(i) Payments made under assignments; or
(ii) Claims excepted from the release as required by paragraph (h)(2) of the Allowable Cost and Payment clause.
(3) If this contract is terminated in its entirety, the portion of the target fee payable shall not be subject to an increase or decrease as provided in this paragraph. The termination shall be accomplished in accordance with other applicable clauses of this contract.
(4) For the purpose of fee adjustment, "total allowable cost" shall not include allowable costs arising out of-
(i) Any of the causes covered by the Excusable Delays clause to the extent that they are beyond the control and without the fault or negligence of the Contractor or any subcontractor;
(ii) The taking effect, after negotiating the target cost, of a statute, court decision, written ruling, or regulation that results in the Contractor’s being required to pay or bear the burden of any tax or duty or rate increase in a tax or duty;
(iii) Any direct cost attributed to the Contractor’s involvement in litigation as required by the Contracting Officer pursuant to a clause of this contract, including furnishing evidence and information requested pursuant to the Notice and Assistance Regarding Patent and Copyright Infringement clause;
(iv) The purchase and maintenance of additional insurance not in the target cost and required by the Contracting Officer, or claims for reimbursement for liabilities to third persons pursuant to the Insurance Liability to Third Persons clause;
(v) Any claim, loss, or damage resulting from a risk for which the Contractor has been relieved of liability by the Government Property clause; or
(vi) Any claim, loss, or damage resulting from a risk defined in the contract as unusually hazardous or as a nuclear risk and against which the Government has expressly agreed to indemnify the Contractor.
(5) All other allowable costs are included in "total allowable cost" for fee adjustment in accordance with this paragraph (e), unless otherwise specifically provided in this contract.
(f) Contract modification. The total allowable cost and the adjusted fee determined as provided in this clause shall be evidenced by a modification to this contract signed by the Contractor and Contracting Officer.
(g) Inconsistencies. In the event of any language inconsistencies between this clause and provisioning documents or Government options under this contract, compensation for spare parts or other supplies and services ordered under such documents shall be determined in accordance with this clause.
(End of clause)