Overview
FAR 16.401 establishes the framework for incentive contracts, which are designed to improve contractor performance and reduce costs by linking the amount of profit or fee to specific acquisition objectives. These contracts are utilized when a firm-fixed-price contract is inappropriate and require a formal determination that the incentive structure is in the government's best interest.
Key Rules
- Categories: There are two primary categories of incentive contracts: Fixed-Price Incentive (preferred when costs/requirements are certain) and Cost-Reimbursement Incentive.
- Mandatory Documentation: A Determination and Finding (D&F), signed by the Head of the Contracting Activity (HCA), is required for all incentive- and award-fee contracts.
- Performance Targets: Incentives must be applied to performance targets rather than minimum performance requirements; rewards are for surpassing targets, and decreases in fee occur when targets are not met.
- Award-Fee Specifics:
- Must be supported by a formal Award-Fee Plan and an Award-Fee Board.
- No Rollover: The use of "rollover" (moving unearned fee from one period to another) is strictly prohibited.
- Performance Floor: No award fee may be earned if the contractor’s aggregate performance is "below satisfactory."
- Standardized Ratings: Agencies must use specific adjectival ratings (Excellent, Very Good, Good, Satisfactory, Unsatisfactory) and associated fee pool percentages.
- Data Collection: Agencies are required to collect and analyze data on the effectiveness of incentives to inform future acquisition planning.
Practical Implications
- Administrative Burden: These contracts require significantly more government oversight and administrative effort than fixed-price contracts due to the need for Award-Fee Boards and detailed performance evaluations.
- Subjective vs. Objective: While formula-type incentives rely on objective data, award-fee contracts allow the government to exercise discretion in evaluating performance under complex conditions where objective targets are not feasible.
- Risk Management: By prohibiting the rollover of unearned fees, the government ensures that contractors remain motivated to perform at a high level during every evaluation period without the hope of "making up" lost profit later.