Incentive Contracting

Abstract

As Vern Edwards' Foreward explains: The Department of Defense recently directed the military services to use Fixed-Price Incentive (Firm Target) FPI(F) contracts instead of cost-reimbursement contracts when it makes sense to do so, and we can expect a surge in their use in the near future. The FPI(F) contract is the most complex of all of the standard pricing arrangements described in FAR Part 16, “Types of Contracts,” and the people who will have to negotiate and administer them are going to need all of the guidance that they can get. Professor Nash’s valuable monograph went out of print long ago, but it is now being republished in its original form and made freely available online. Except for a few references to old regulations, the monograph is just as useful today as it was in 1963. The most useful parts are Chapters I through V. The material contained in those chapters is practical guidance about how to think about, negotiate, and administer all three of the formula-type incentive arrangements.

Contract incentives have an intuitive appeal, and enthusiasm for them has been fed by countless undocumented claims of success, including some tall tales and phony “success stories.” Interest, if not enthusiasm, is on the rise again. That being the case, Professor Nash’s treatise is a good starting place for those without much experience in this intriguing, if troublesome and dubious, approach to contract pricing.

Keywords: Incentive Contracting, Government Contracts, Public Procurement, Profit Policy

JEL Classification: H57