Contracts & Legal

Fixed-Price Incentive (Successive Targets)

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Description. A fixed price incentive (successive target) contract (FAR 16.403-2) is an incentive type contract that operates in the same way as a Fixed Price Incentive (firm target) contract except that one or more revisions in the target cost and target profit may be made during performance. At the beginning, the contracting officer shall specify in the contract schedule the initial target cost, initial target profit, and initial target price for each item subject to a future revision.

A fixed-price incentive (successive targets) contract is appropriate when:

  1. Available cost or pricing information is not sufficient to permit the negotiation of a realistic firm target cost and profit before award;
  2. Sufficient information is available to permit negotiation of initial targets; and
  3. There is reasonable assurance that additional reliable information will be available at an early point in the contract performance so as to permit negotiation of either (i) a firm fixed price or (ii) firm targets and a formula for establishing final profit and price that will provide a fair and reasonable incentive.

When the revision point specified in the contract is reached, the parties negotiate the firm target cost, giving consideration to cost experience under the contract and other pertinent factors. The firm target profit is established by the formula. At this point, the parties have two alternatives, as follows:

  1. They may negotiate a firm fixed price, using the firm target cost plus the firm target profit as a guide.
  2. If negotiation of a firm fixed price is inappropriate, they may negotiate a formula for establishing the final price using the firm target cost and firm target profit. The final cost is then negotiated at completion, and the final profit is established by formula, as under the fixed-price incentive.

Limitations. This contract is applicable under the same circumstances as the FPI (firm target) contract except that realistic firm targets cannot be negotiated at the outset.

AcqLinks and References:

– Website: 16.403-2 Fixed-price incentive (successive targets) contracts

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