FPIFIXEDPRICE (Incentive)

What is FPIFIXEDPRICE (Incentive)?

FPIFIXEDPRICE, or Fixed-Price Incentive (Firm Target) contracts, are a type of contract used in government contracting that provides for a firm fixed price. However, this fixed price is subject to adjustment based on the contractor's performance relative to specified target costs, target profits, and a profit adjustment formula. The FPIFIXEDPRICE structure is designed to incentivize contractors to efficiently manage costs and achieve or exceed pre-defined performance goals.

Definition

A Fixed-Price Incentive (Firm Target) contract, as described in FAR Part 16, establishes a target cost, a target profit, a price ceiling, and a formula for establishing final profit or fee. The final price is determined by this formula based on the relationship between the final negotiated cost and the target cost. The final profit or fee is adjusted based on the actual cost outcome, incentivizing the contractor to manage costs effectively. This contract type provides a balance between risk and reward, encouraging efficient performance while providing the government with a firm ceiling price that cannot be exceeded (except in specific, pre-defined circumstances).

This type of contract is suitable when a fair and reasonable price can be established at the outset but incentivizing efficient performance and cost control is desired. Government contractors need to understand the specific incentive structure and how their performance will impact the final price and profit to effectively manage these contracts. Accurate cost accounting and rigorous project management are crucial for success with FPIFIXEDPRICE contracts.

Key Points

• Target Cost: A negotiated estimate of the total cost of the contract. This serves as the baseline for incentive calculations.
• Target Profit: The agreed-upon profit or fee the contractor is expected to earn if the target cost is achieved.
• Price Ceiling: The maximum amount the government will pay under the contract, regardless of the contractor's actual costs. This protects the government from cost overruns.
• Incentive Formula: This formula defines how the profit or fee will be adjusted based on the difference between the target cost and the final cost. A typical formula might be "80/20 sharing" where the government and contractor split the difference between target and actual cost at 80% and 20% respectively.

Practical Examples

1. Software Development Project: A government agency contracts a firm to develop a software application with a target cost of $1 million and a target profit of $100,000. The contract includes a price ceiling of $1.2 million and an 80/20 sharing arrangement. If the contractor completes the project for $900,000, they share 20% of the $100,000 savings, increasing their profit.
2. Equipment Manufacturing: A contractor is hired to manufacture specialized equipment. The target cost is $5 million, with a target profit of $500,000 and a ceiling price of $6 million. If the contractor manages costs effectively and completes the manufacturing for $4.5 million, the agreed-upon formula dictates how the cost savings are shared, boosting contractor profits.
3. Service Contract with Performance Metrics: A contractor provides IT support services under an FPIFIXEDPRICE contract. The target cost is $2 million, and the contract specifies performance metrics like response time and resolution rate. If the contractor exceeds these metrics and achieves a lower actual cost due to increased efficiency, the incentive formula rewards them with a higher profit, subject to the price ceiling.