[Code of Federal Regulations]
[Title 48, Volume 1]
[Revised as of October 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 48CFR16.401]

[Page 301-302]
 
            TITLE 48--FEDERAL ACQUISITION REGULATIONS SYSTEM
 
                CHAPTER 1--FEDERAL ACQUISITION REGULATION
 
PART 16_TYPES OF CONTRACTS--Table of Contents
 
                    Subpart 16.4_Incentive Contracts
 
Sec.  16.401  General.


    (a) Incentive contracts as described in this subpart are appropriate 
when a

[[Page 302]]

firm-fixed-price contract is not appropriate and the required supplies 
or services can be acquired at lower costs and, in certain instances, 
with improved delivery or technical performance, by relating the amount 
of profit or fee payable under the contract to the contractor's 
performance. Incentive contracts are designed to obtain specific 
acquisition objectives by--
    (1) Establishing reasonable and attainable targets that are clearly 
communicated to the contractor; and
    (2) Including appropriate incentive arrangements designed to (i) 
motivate contractor efforts that might not otherwise be emphasized and 
(ii) discourage contractor inefficiency and waste.
    (b) When predetermined, formula-type incentives on technical 
performance or delivery are included, increases in profit or fee are 
provided only for achievement that surpasses the targets, and decreases 
are provided for to the extent that such targets are not met. The 
incentive increases or decreases are applied to performance targets 
rather than minimum performance requirements.
    (c) The two basic categories of incentive contracts are fixed-price 
incentive contracts (see 16.403 and 16.404) and cost-reimbursement 
incentive contracts (see 16.405). Since it is usually to the 
Government's advantage for the contractor to assume substantial cost 
responsibility and an appropriate share of the cost risk, fixed-price 
incentive contracts are preferred when contract costs and performance 
requirements are reasonably certain. Cost-reimbursement incentive 
contracts are subject to the overall limitations in 16.301 that apply to 
all cost-reimbursement contracts.
    (d) Award-fee contracts are a type of incentive contract.

[48 FR 42219, Sept. 19, 1983, as amended at 62 FR 12695, Mar. 17, 1997]