(ii) Target costs and a fee adjustment formula can be negotiated, which may motivate the contractor to manage effectively. The fixed-fee contract is the most advantageous for the employer because it limits the total cost of the project. Insurance can protect against the contractor who does not complete the project. The simplest contract for the contractor is the cost plus the fixed fee, as it requires no effort to get the project under budget and on time. The best contract for both parties is the cost plus incentive fee, as it limits the cost of the project and incentivizes the contractor to control costs. 3) Performance incentive (FAR 16.402-2) Performance incentives may be associated with certain product characteristics (e.B. the range of a missile, the speed of the aircraft, the thrust of the engine or the manoeuvrability of a vehicle) or other specific elements of the contractor`s performance. Such incentives should be designed in such a way as to establish a link between the profit or fee and the results achieved by the contractor in relation to the objectives set (a) description. The cost plus incentive fee contract is a cost reimbursement contract that provides that the fees originally negotiated are then adjusted according to a formula based on the ratio of total eligible costs to total target cost. This type of contract specifies the target cost, target fees, minimum and maximum fees, and a fee adjustment formula. After the performance of the contract, the fee to be paid to the contractor is determined according to the formula. The formula provides, within certain limits, for fee increases beyond the target charge if the total eligible costs are below the target cost, and for fee reductions below the target fee if the total eligible costs exceed the target costs.
This increase or decrease is intended to encourage the contractor to effectively manage the contract. If the total eligible costs are above or below the cost range within which the fee adjustment formula operates, the Contractor shall receive the total eligible costs plus the minimum or maximum fee. 5) Structuring multi-incentive contracts (FAR 16.402-4) A well-structured multiple incentive agreement should motivate the entrepreneur to strive for exceptional results in all incentive areas. (1) Fixed Price Incentive Contracts (FAR 16,403) A fixed price incentive contract is a fixed price incentive contract that provides for the adjustment of profit and the determination of the final contract price by applying a formula based on the ratio between the total final costs negotiated and the total target costs. The final price is subject to a price cap, which is negotiated at the beginning. The two forms of fixed-price, fixed-target and successive target incentive contracts are described in more detail below. In addition, the contract should allow for a reduction in the target fee if the actual costs increase beyond the target costs specified in the contract. These potential fluctuations are incorporated into the contract to further incentivize the contractor to manage the project as efficiently as possible. Costs below the target costs incur incentive fees. The evolution of costs above the target costs means that the service provider submits a portion of the target fees. A fixed fee plus cost contract is typically used when the cost of a project is difficult to estimate. This could potentially pose a potential financial risk to contractors competing for a successful bid for the project.
Contracts of this type are awarded mainly on the basis of the fees offered by the contractor. It is important to note that costs plus fixed-fee contracts do not provide an incentive for contractors to effectively manage the costs associated with the project. If the actual cost is greater than the target cost, by . B 1,100, the customer pays: 1,100 + 100 + (1,000 – 1,100) * 0.2 = 1,180 (the entrepreneur earns 80). During the negotiation phase of the contract, both parties have the opportunity to discuss their position and reach an optimal agreement for all parties involved. This formula allows for fee increases that may potentially exceed the target fee to the extent reasonable. However, this should only be allowed if the actual costs are lower than the target costs. Incentive contracts allow risk sharing between the contractor and the client.
The Contractor will be reimbursed for all justified costs in addition to a calculated fee. The basic elements of a CPIF contract are: Application of predetermined and formulated incentives: A fixed-price contract is not a repayment contract. The contractor estimates the total cost of the material and labour and includes it in its bid price, and the contract is usually awarded to the lowest bid. The total amount received by the contractor covers these costs. This provides a strong incentive for the contractor to control the costs and time required to complete the project. A problem with this type of contract arises when the contractor underestimates the cost, there are unexpected delays, or material prices rise significantly. In these cases, the contractor may be forced to cease operations or terminate the contract before the end of the project. This increase or decrease is intended to encourage the contractor to effectively manage the contract. If the total eligible costs are above or below the cost range within which the fee adjustment formula operates, the Contractor shall receive the total eligible costs plus the minimum or maximum fee. An incentive agreement (Subpart 16.4 of the Federal Procurement Regulations (FAR)) is appropriate if a fixed-price contract (FFP) is not reasonable and the required supplies or services can be purchased at a lower cost and the amount of profit or fees payable under the contract is related to the contractor`s performance.
Incentive contracts are designed to achieve specific acquisition objectives by: 4) Delivery Incentives (FAR 16-402-3) Delivery Incentives should be considered if improving a required delivery schedule is a key government objective. It is important to determine the government`s main objectives in a particular contract (for example. B delivery as early as possible or production in volume as early as possible). A cost plus cost incentives contract is a special type of fixed-price contract that provides contractors and sellers with additional financial incentives to keep the cost of the project as low as possible. .