In a Fixed-Price-Incentive contract, the final price is influenced by the relationship between which two costs?

In a Fixed-Price-Incentive contract, the final price is influenced by the relationship between which two costs?

• A. Final negotiated total cost and total target cost
• B. Actual cost and estimated future cost
• C. Target price and government budget
• D. Labor hours and material costs

Answer: (A)

In a Fixed-Price-Incentive contract, the final price moves with cost performance relative to a baseline. The two costs that matter are the final negotiated total cost (the actual total cost incurred) and the total target cost (the baseline cost set at the start). The difference between these costs, scaled by the contract’s sharing factor, determines how much the final price deviates from the target price. If actual costs come in under the target, the contractor shares in some of the savings; if costs exceed the target, the contractor bears part of the overrun. For example, with a target cost of 1,000,000 and final cost of 1,100,000, a 60% sharing factor adds 60,000 to the target price; if the final cost is 900,000, the price would drop accordingly. The other options don’t capture this direct link between final total cost and target cost that drives the incentive adjustment.

In a Fixed-Price-Incentive contract, the final price moves with cost performance relative to a baseline. The two costs that matter are the final negotiated total cost (the actual total cost incurred) and the total target cost (the baseline cost set at the start). The difference between these costs, scaled by the contract’s sharing factor, determines how much the final price deviates from the target price. If actual costs come in under the target, the contractor shares in some of the savings; if costs exceed the target, the contractor bears part of the overrun. For example, with a target cost of 1,000,000 and final cost of 1,100,000, a 60% sharing factor adds 60,000 to the target price; if the final cost is 900,000, the price would drop accordingly. The other options don’t capture this direct link between final total cost and target cost that drives the incentive adjustment.