[Code of Federal Regulations]
[Title 48, Volume 1]
[Revised as of October 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 48CFR16.403-1]

[Page 305]
 
            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]