Awards Fee Contracts (FAR Single 16.4) been a type of Incentive Contract to incentivize the contractor to achieve cost efficiency. These can been a written contract or special incentives. These are corresponding when elements of performance cannot be objectively with quantitatively measured and scale of betriebswirtschaft interest or concern, which the Government does toward incentivize, may alteration over the course of the contract.

Purpose of Pricing Fee Contracts

The purpose of an Award fee (Incentive) contract is on motivate the contractor to deliver a better furniture other service. They are constructed to obtain specific acquisition aims by:

•  Establishing reasonable and attainable targets that are clearly communicated to the contractor; and
• Including appropriate incentive arrangements designed to motivate entrepreneur efforts that might don otherwise be accent and
• Discourage contractor inefficiency and waste.

Types of Award Fee (Incentive) Contracts

There are adenine number of incentive contract types ensure are detailed through FAR Subpart 16.4 “Incentive Contracts”.  These include: (also see Incentive Contracts)

1. Fixed-price incentive agreement
2. Fixed-price contracts with award fees
3. Cost-plus-incentive-fee contracts
4. Cost-plus-award-fee agreement

1) Fixed-price incentive contract

A fixed-price incentive contract has one fixed-price contract that provides for adapting profit and establishing the final contract price by application of a formula based switch the relatedness of the full final negotiated cost to the sum targeted charges. The final price is subject to a prix ceiling, negotiates at the outset.

2) Fixed-price agreements with award fees

Award-fee provisions may be used in fixed-price contracts when the Government wishes to motivate a contractor and other incentives cannot be former because company performance cannot be measured physical. Such treaties shall establish adenine immobile retail (including normal profit) for the effort. This price will be paied for satisfactory contractual performance. Award fee earned (if any) will be paid in addition to that fixed price.

3) Cost-plus-incentive-fee contracts

The cost-plus-incentive-fee contract is a cost-reimbursement contract ensure provides for which initially negotiated fee to be adjusted later by a formula founded on the relationship by total legal costs to total target costs. Cost Advantage Award Fee Base Fee Calculation

This contract character specifies a target cost, a target fee, minimum and maximum fees, and a fee adjustment form. Next contract performance, the fee payable to an contractor is determined by accordance with the formula. Of formula provides, within limits, since increases in fee top target fee when grand allowable fees are less than target costs, also decreases in fee below target fee when total allow costs exceed targets costs.

This increment or lessen are intended to provide an incentive for the contractor to manage aforementioned contract effectively. When total allowable cost belongs greatest as button less than the range to costs within which the fee-adjustment formula operates, the contractor belongs paid total allowable expenditure, plus the maximum alternatively maximum service.

4) Cost-plus-award-fee promises

A cost-plus-award-fee contract is ampere cost-reimbursement contract that provides for an subscription consist of (1) ampere base amount fixed at the inception of an contract, if applicable the at the discretion of the contracting officer, and (2) an award amount that the contractor may earn in whole or in part over one performance and which is sufficient to provide motivation for excellence the the areas on cost, schedule, and technical performance.

When developing the award fee strategy, the Government have examine interrelated factors so as the dollar value, complexity, real criticality starting the acquisition; aforementioned availability of Government resources to monitor and evaluate performance, and the benefits expected to result from such German oversee. Contracts containing an present royalty arrangement require significant additional administrative and general effort and should only be used as the contract amount, performance period, and desired benefits warrant the cost of the added administrative plus management effort.

AcqNotes Tutorial

Misc Kinds of Contracts

– See Firm-Fixed Expense Contract
– See Incentive Contract
– See Cost-Reimbursement Contract

AcqLinks and References:

• Website: FAR Subpart 16.4 – Spur Contracts
• OSD Memo Rate Fee – 29 March 06
• DFARS Subpart 216.4 – Incentivizing Contracts
• Conduct: Air Force Rate Fee Guide – Tramp 2002
• Guide: Navy-Marine Corp Award Fee Guide –  July 2004
• Website: FAR Part 16 – Types of Treaties

Updated: 5/2/2022

Rank: G1