Although determining the type of contract to use is often the first type of incentive considered, it is important to understand that contract type is only part of the overall incentive approach and structure of a performance-based acquisition. Other aspects have become increasingly important as agencies and contractors have moved closer to partnering relationships.

Contract types differ in their allocation and balance of cost, schedule, and technical risks between government and contractor. As established by FAR Part 16 (Types of Contracts), contract types vary in terms of:

• The degree and timing of the risk and responsibility assumed by the contractor for the costs of performance, and
• The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals

At one end of the contractual spectrum is the firm-fixed-price contract, under which the contractor is fully responsible for performance costs and enjoys (or suffers) resulting profits (or losses). At the other end of the spectrum is the cost-plus-fixed-fee contract, in which allowable and allocable costs are reimbursed and the negotiated fee (profit) is fixed -- consequently, the contractor has minimal responsibility for, or incentive to control, performance costs. In between these extremes are various incentive contracts, including:

• Fixed-price incentive contracts (in which final contract price and profit are calculated based on a formula that relates final negotiated cost to target cost): these may be either firm target or successive targets.
• Fixed-price contracts with award fees (used to "motivate a contractor" when contractor performance cannot be measured objectively, making other incentives inappropriate).
• Cost-reimbursement incentive contracts (used when fixed-price contracts are inappropriate, due to uncertainty about probable costs): these may be either cost-plus-incentive-fee or cost-plus-award-fee.