Overview
This section defines fixed-price incentive contracts as a category of fixed-price agreements where the final price and profit are determined by a formula comparing actual negotiated costs to established target costs. It serves as a regulatory pointer to Subpart 16.4 for comprehensive guidance on implementation and mandatory clauses.
Key Rules
- Pricing Mechanism: The final contract price is determined by adjusting profit based on the relationship between final negotiated total cost and total target cost.
- Formula Requirement: These contracts must include a specific formula for adjusting profit and establishing the final price.
- Regulatory Reference: Detailed descriptions, applications, and limitations are governed by FAR 16.403 rather than Subpart 16.2.
- Contract Clauses: Required clauses for these contract types are prescribed in FAR 16.406.
Practical Implications
- These contracts are used to align the contractor's profit motive with the government's interest in cost control, requiring rigorous cost accounting and negotiation of targets.
- Contracting officers must look to Subpart 16.4 to find the specific legal limitations and mandatory terms required to make the incentive structure valid and enforceable.