Under an FPI contract, profit is inversely related to cost; as costs go down, profit goes up (and vice versa). Therefore, it is believed that this contract type provides a positive incentive to the contractor to control costs. The necessary elements for a FPI contract are:
- Target Cost - best estimate of expected cost
- Target Profit - fair profit at target cost
- Share Ratio(s) - to adjust profit after actual costs are documented (defaults to 50/50)
- Ceiling Price - to limit the maximum the government may pay (defaults to 120%)
There is a significant downside to FPI contracts from a contractor's perspective. These contracts have to be tracked like cost-reimbursable contracts and included in contractors annual incurred cost submissions. Given that DCAA is hopelessly delinquent in auditing contractor incurred costs, the probability of negotiating a final contract price for purposes of calculating the final profit amount, in a reasonable amount of time, is slim. By comparison, contractors do not need to wait for a final audit before receiving final payment for fixed-price contracts.