Federal Acquisition Regulation
Cost incentives
FAR 16.402-1
(a) Most incentive contracts include only cost incentives, which take the form of a profit or fee adjustment formula and are intended to motivate the contractor to effectively manage costs. No incentive contract may provide for other incentives without also providing a cost incentive (or constraint). (b) Except for award-fee contracts (see Fixed-price contracts with award fees (FAR 16.404) and General (FAR 16.401) (e)), incentive contracts include a target cost, a target profit or fee, and a profit or fee adjustment formula that (within the constraints of a price ceiling or minimum and maximum fee) provides that- (1) Actual cost that meets the target will result in the target profit or fee; (2) Actual cost that exceeds the target will result in downward adjustment of target profit or fee; and (3) Actual cost that is below the target will result in upward adjustment of target profit or fee.
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