DoD updated their acquisition regulations to increase the used of fixed-price incentive contracts, especially for acquisitions moving from development to production. The theory is that contracts with incentives will increase productivity and innovation in industry and ultimately reduce costs to the Government.
Under the new provision at DFARS 216.403-1, contracting officers are instructed to "give particular attention" to the use of fixed-price incentive contracts. The default ceiling is 120 percent and the default share ratio is 50/50. Both the ceiling and share ratio can be adjusted when properly justified and documented by the contracting activity.
Contractors who agree to fixed-price incentive contracting must be extremely confident of their estimated costs, including indirect expenses/rates. Volatility and uncertainty of costs can adversely affect a contract's profitability.
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