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Use of Incentive Contracts

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Can you please help me with the following questions.

1. Is it possible or even appropriate to ever combine the two types of incentive contracts such that both incentive and award fees may be earned on the same contract?

2. What sort of objective measurements might be applied?

3. What sort of objective disincentives (penalties) might be applied?

4. What are the concerns about the use of disincentives?

5. As a business advisor to your customer, what guidance might you give them regarding the use of an incentive contract when procuring a complex, high profile requirement where those requirements may not be clearly known?

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The response addressed the query is posted in 1202 words with references

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The response addressed the query is posted in 1202 words with references

//A contract refers to the legal agreement between two parties. There are two types of incentive contract, which are the firm-fixed-price contract and cost-reimbursement contracts. In this context, the essay is based on the detailed analysis of the features and guidelines on which these contracts are based. The next sections highlight the different types of incentive contracts, along with the objective measurement, considered in the contracts.//
Types of Incentive Contracts
Incentive contracts are used when the required services or supplies can be acquired at a low price and the firm-fixed-price contract is not appropriate and in certain instances, with enhanced technical and delivery performance, by relating the money incurred in fee or profit payable to the contractor's performance under the contract. The contract can be classified into two broad categories, which are fixed-price contracts and cost-reimbursement contracts (Lowe, 2013). Under the fixed-price contract, the contractor is paid a fixed sum of money as consideration for the performance.
In the cost-reimbursement contracts, the contractor is reimbursed by the government for the allocable, allowable and reasonable costs of performance (Rumbaugh, 2010). It is possible to combine the two types of incentive contracts that both incentive and award fees many be earned on the same contract. Award-fee contracts are categorized as incentive contract or a cost-plus-award-fee (CPAF) contract which is also known as a cost-reimbursement contract that provides an amount related to the award that the contractor may earn in part or whole during the performance and provides at inception of the contract, a fee consisting of a base amount.
The award is required to motivate excellence in different areas such as timeliness, cost-effective management, quality and technical ingenuity (Rumbaugh, 2010). The award amount is identified subjective judgment of the government based on the performance of the contractor in terms of the criteria listed in the contract. The method and ...

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Ashish Sharma, MBA (IP)
Education
  • MBA (IP), International Center for Internationa Business
  • BBA, University of Rajasthan
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