Contract Compliance Associates

Incentive Contracts in General

There are three types of incentives that are applied to contracts:

1. Cost Incentives
2. Performance Incentives
3. Delivery Incentives

Incentive contracts are appropriate when a firm-fixed-price contract is not appropriate and the required supplies or services can be acquired at lower costs and, in certain instances, with improved delivery or technical performance, by relating the amount of profit or fee payable under the contract to the contractor's performance.

Cost Incentive Contracts

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).

Performance Incentive Contracts

Performance incentives may be considered in connection with specific product characteristics or other specific elements of the contractor's performance. These incentives should be designed to relate profit or fee to results achieved by the contractor, compared with specified targets.

Delivery Incentive Contracts

Delivery incentives should be considered when improvement from a required delivery schedule is a significant Government objective.

Contracts can be crafted with a combination of incentives for improvements in the incentive areas of interest to the government.