Overview
This section outlines how warranty costs must be integrated into the financial structure of fixed-price incentive contracts, specifically regarding target prices, ceiling prices, and the final price settlement.
Key Rules
- Price Establishment: The estimated cost of a warranty must be factored into both the incentive target price and the ceiling price at the outset of the contract.
- Final Price Determination: All actual or estimated costs incurred by the contractor to comply with the warranty must be included in the negotiation of the total final price.
- Post-Settlement Liability: Once the total final price is established, any further costs for warranty compliance are the sole responsibility of the contractor at no additional cost to the Government.
Practical Implications
- Contractors must ensure accurate actuarial or historical data is used to forecast warranty expenses, as underestimating these costs will directly reduce their profit once the final price is locked.
- The Government avoids "tail" costs after contract closeout, as the fixed-price nature of the settlement shifts all subsequent performance risk to the contractor.