[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: 48CFR16.403-2]



[Page 315]

 

            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. 16.403-2  Fixed-price incentive (successive targets) contracts.



    (a) Description. (1) A fixed-price incentive (successive targets) 

contract specifies the following elements, all of which are negotiated 

at the outset:

    (i) An initial target cost.

    (ii) An initial target profit.

    (iii) An initial profit adjustment formula to be used for 

establishing the firm target profit, including a ceiling and floor for 

the firm target profit. (This formula normally provides for a lesser 

degree of contractor cost responsibility than would a formula for 

establishing final profit and price.)

    (iv) The production point at which the firm target cost and firm 

target profit will be negotiated (usually before delivery or shop 

completion of the first item).

    (v) A ceiling price that is the maximum that may be paid to the 

contractor, except for any adjustment under other contract clauses 

providing for equitable adjustment or other revision of the contract 

price under stated circumstances.

    (2) When the production point specified in the contract is reached, 

the parties negotiate the firm target cost, giving consideration to cost 

experience under the contract and other pertinent factors. The firm 

target profit is established by the formula. At this point, the parties 

have two alternatives, as follows:

    (i) They may negotiate a firm fixed price, using the firm target 

cost plus the firm target profit as a guide.

    (ii) If negotiation of a firm fixed price is inappropriate, they may 

negotiate a formula for establishing the final price using the firm 

target cost and firm target profit. The final cost is then negotiated at 

completion, and the final profit is established by formula, as under the 

fixed-price incentive (firm target) contract (see 16.403-1 above).

    (b) Application. A fixed-price incentive (successive targets) 

contract is appropriate when--

    (1) Available cost or pricing information is not sufficient to 

permit the negotiation of a realistic firm target cost and profit before 

award;

    (2) Sufficient information is available to permit negotiation of 

initial targets; and

    (3) There is reasonable assurance that additional reliable 

information will be available at an early point in the contract 

performance so as to permit negotiation of either (i) a firm fixed price 

or (ii) firm targets and a formula for establishing final profit and 

price that will provide a fair and reasonable incentive. This additional 

information is not limited to experience under the contract, itself, but 

may be drawn from other contracts for the same or similar items.

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

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

data for negotiating firm targets and a realistic profit adjustment 

formula, as well as later negotiation of final costs; and

    (2) Cost or pricing information adequate for establishing a 

reasonable firm target cost is reasonably expected to be available at an 

early point in contract performance.

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

contract Schedule the initial target cost, initial target profit, and 

initial 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]