Overview
This section prescribes the rules for using predetermined formulas to adjust contractor profit or fee based on cost, performance, and delivery outcomes. It establishes that while multiple incentives can be used, a cost incentive must always serve as the foundational constraint to ensure technical or schedule gains are economically viable.
Key Rules
- Mandatory Cost Incentive: No incentive contract may include performance or delivery incentives without also providing a cost incentive or constraint.
- Cost Adjustment Formula: Contracts must specify a target cost, target profit/fee, and a formula where actual costs below target increase profit/fee, and actual costs above target decrease it.
- Objectivity and Measurement: Performance incentives must be based on objectively measurable tasks, specific test criteria, and clear standards to determine if targets were achieved.
- Balanced Incentives: In multiple-incentive contracts, individual technical characteristics must be balanced so that no single metric is pursued to the detriment of overall system performance.
- Exclusion of Government Factors: Incentives must be structured so that contractors are neither rewarded nor penalized for the performance of Government-furnished components or Government-caused delays.
- Administrative Coordination: Due to their complexity, contracting officers must negotiate performance incentives in coordination with Government engineering and pricing specialists.
Practical Implications
- Contractors are compelled to make strategic trade-offs between cost, schedule, and technical performance, as the mandatory cost incentive prevents "gold-plating" a product at the Government's expense.
- The requirement for specific test criteria and explicit agreements on how contract changes affect incentives reduces the likelihood of disputes during contract administration and closeout.