[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: 48CFR16.402-2]

[Page 302-303]
 
            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.  16.402-2  Performance incentives.

    (a) Performance incentives may be considered in connection with 
specific product characteristics (e.g., a missile range, an aircraft 
speed, an engine thrust, or a vehicle maneuverability) or other specific 
elements of the contractor's performance. These incentives should be 
designed to relate profit or fee to results achieved by the contractor, 
compared with specified targets.
    (b) To the maximum extent practicable, positive and negative 
performance incentives shall be considered in connection with service 
contracts for performance of objectively measurable tasks when quality 
of performance is critical and incentives are likely to motivate the 
contractor.
    (c) Technical performance incentives may be particularly appropriate 
in major systems contracts, both in development (when performance 
objectives are known and the fabrication of prototypes for test and 
evaluation is required) and in production (if improved performance is 
attainable and highly desirable to the Government).
    (d) Technical performance incentives may involve a variety of 
specific characteristics that contribute to the overall performance of 
the end item. Accordingly, the incentives on individual

[[Page 303]]

technical characteristics must be balanced so that no one of them is 
exaggerated to the detriment of the overall performance of the end item.
    (e) Performance tests and/or assessments of work performance are 
generally essential in order to determine the degree of attainment of 
performance targets. Therefore, the contract must be as specific as 
possible in establishing test criteria (such as testing conditions, 
instrumentation precision, and data interpretation) and performance 
standards (such as the quality levels of services to be provided).
    (f) Because performance incentives present complex problems in 
contract administration, the contracting officer should negotiate them 
in full coordination with Government engineering and pricing 
specialists.
    (g) It is essential that the Government and contractor agree 
explicitly on the effect that contract changes (e.g., pursuant to the 
Changes clause) will have on performance incentives.
    (h) The contracting officer must exercise care, in establishing 
performance criteria, to recognize that the contractor should not be 
rewarded or penalized for attainments of Government-furnished 
components.

[48 FR 42219, Sept. 19, 1983, as amended at 62 FR 44815, Aug. 22, 1997]