What is fixed-price incentive fee?

A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost. The final price is subject to a price ceiling, negotiated at the outset.

Why would a contractor propose an incentive fee?

The purpose of incentive contracts is to tie a financial reward to the completion of an objective. Incentive contracting typically involves a fixed price or cost reimbursement contract. Discouragement from waste and inefficiency when pursuing objectives.

What is the difference between award fee and incentive fee?

Award Fee: The amount is not predetermined in the contract and the fee is determined by the owner subjectively evaluating the contractor’s performance. Incentive Fee: The amount is predetermined in the contract based on achieving certain objectives agreed to in the contract.

What is a price incentive?

a common form of sales promotion in which price reductions are offered to consumers to encourage them to buy a particular product earlier or in larger quantity.

How does fixed price incentive fee work in FPIF?

In FPIF, there’s a ceiling price, the buyer will never pay above this price. The seller’s profit decreases as the costs rises above the target cost. Once it hits the PTA, the buyer will no longer share the cost overrun, any cost overrun from that point onward will be totally absorbed by the seller.

When is a fixed price incentive contract appropriate?

(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 do you have to charge an incentive fee?

In general, an incentive fee isn’t incurred if a fund falls off that high. Managers tend to charge a fee only when they exceed the high-water mark. A hurdle would be a predetermined level of return a fund must meet to earn an incentive fee. Hurdles can take the form of an index or a set, predetermined percentage.

How is the price ceiling determined in FPIF contracts?

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.