Definition
Incentive Fee Variable fee tied to contractor achievement of specific cost, schedule, or performance targets.
Definition
An incentive fee is a variable fee component in a cost-plus-incentive-fee (CPIF) or fixed-price-incentive (FPI) contract that adjusts based on contractor performance against specific, objective, measurable targets. Unlike award fees based on subjective evaluation, incentive fees are calculated using predetermined formulas tied to cost, schedule, or technical performance outcomes. The incentive structure includes target cost/performance, share ratios that determine how over/under performance affects fee, and ceiling/floor limits on total fee. Incentive contracts motivate cost control and performance improvement by sharing savings or overruns between government and contractor. Properly structured incentives align contractor motivation with government objectives.
Also Known As
- Performance Incentive
- CPIF Fee
- FPI Fee
Examples
Common Mistakes to Avoid
- ✕Not fully understanding incentive formula calculations
- ✕Setting unrealistic targets that provide no meaningful incentive
- ✕Focusing on fee maximization rather than program success
Who Should Know This Term
Contracts administrators, pricing analysts, program managers, cost accountants
Official Source
FAR 16.405-1
