[Code of Federal Regulations]

[Title 48, Volume 1]

[Revised as of October 1, 2005]

From the U.S. Government Printing Office via GPO Access

[CITE: 48CFR16.403-1]



[Page 314]

 

            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. 16.403-1  Fixed-price incentive (firm target) contracts.



    (a) Description. A fixed-price incentive (firm target) contract 

specifies a target cost, a target profit, a price ceiling (but not a 

profit ceiling or floor), and a profit adjustment formula. These 

elements are all negotiated at the outset. The price ceiling is the 

maximum that may be paid to the contractor, except for any adjustment 

under other contract clauses. When the contractor completes performance, 

the parties negotiate the final cost, and the final price is established 

by applying the formula. When the final cost is less than the target 

cost, application of the formula results in a final profit greater than 

the target profit; conversely, when final cost is more than target cost, 

application of the formula results in a final profit less than the 

target profit, or even a net loss. If the final negotiated cost exceeds 

the price ceiling, the contractor absorbs the difference as a loss. 

Because the profit varies inversely with the cost, this contract type 

provides a positive, calculable profit incentive for the contractor to 

control costs.

    (b) Application. A fixed-price incentive (firm target) contract is 

appropriate when the parties can negotiate at the outset a firm target 

cost, target profit, and profit adjustment formula that will provide a 

fair and reasonable incentive and a ceiling that provides for the 

contractor to assume an appropriate share of the risk. When the 

contractor assumes a considerable or major share of the cost 

responsibility under the adjustment formula, the target profit should 

reflect this responsibility.

    (c) Limitations. This contract type may be used only when--

    (1) The contractor's accounting system is adequate for providing 

data to support negotiation of final cost and incentive price revision; 

and

    (2) Adequate cost or pricing information for establishing reasonable 

firm targets is available at the time of initial contract negotiation.

    (d) Contract Schedule. The contracting officer shall specify in the 

contract Schedule the target cost, target profit, and target price for 

each item subject to incentive price revision.



[48 FR 42219, Sept. 19, 1983, as amended at 59 FR 64785, Dec. 15, 1994]



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