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FAR and DFARS › FAR Part 16: Types of Contracts › Subpart 16.4

FAR 16.405-1 Cost-plus-incentive-fee contracts.

The codified text (eCFR, as of 2026-10-02). Under the Revolutionary FAR Overhaul ↗, agencies follow class deviations with new text for many parts while the formal rules go through the Federal Register: check the solicitation and your contract's clauses, which rule.

In plain English

This section describes cost-plus-incentive-fee contracts, a type of cost-reimbursement contract where the fee starts at a negotiated target and is later adjusted by a formula comparing total allowable costs to total target costs. The formula raises the fee when costs come in under target and lowers it when costs exceed target, within minimum and maximum limits, to encourage effective contract management. It also explains when this contract type is appropriate and what limits apply.

Applies to: Contracting officers and contractors considering cost-plus-incentive-fee contracts

What it requires

  • Comply with all limitations in 16.301-3 before awarding a cost-plus-incentive-fee contract
  • If a high maximum fee is negotiated, provide for a low minimum fee that may be zero or, in rare cases, negative

Key terms: cost-plus-incentive-fee contract · target cost · target fee · fee adjustment formula · total allowable costs

Written by AI from this section's text. A guide, not legal advice: the text below rules.

The text

(a) Description. The cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for the initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. This contract type specifies a target cost, a target fee, minimum and maximum fees, and a fee adjustment formula. After contract performance, the fee payable to the contractor is determined in accordance with the formula. The formula provides, within limits, for increases in fee above target fee when total allowable costs are less than target costs, and decreases in fee below target fee when total allowable costs exceed target costs. This increase or decrease is intended to provide an incentive for the contractor to manage the contract effectively. When total allowable cost is greater than or less than the range of costs within which the fee-adjustment formula operates, the contractor is paid total allowable costs, plus the minimum or maximum fee.

(b) Application. (1) A cost-plus-incentive-fee contract is appropriate for services or development and test programs when—

(i) A cost-reimbursement contract is necessary (see 16.301-2) and

(ii) A target cost and a fee adjustment formula can be negotiated that are likely to motivate the contractor to manage effectively.

(2) The contract may include technical performance incentives when it is highly probable that the required development of a major system is feasible and the Government has established its performance objectives, at least in general terms. This approach may also apply to other acquisitions, if the use of both cost and technical performance incentives is desirable and administratively practical.

(3) The fee adjustment formula should provide an incentive that will be effective over the full range of reasonably foreseeable variations from target cost. If a high maximum fee is negotiated, the contract shall also provide for a low minimum fee that may be a zero fee or, in rare cases, a negative fee.

(c) Limitations. No cost-plus-incentive-fee contract shall be awarded unless all limitations in 16.301-3 are complied with.

Sections it refers to

Sections that refer to it

  • 16.304 Cost-plus-incentive-fee contracts.

← 16.405 Cost-reimbursement incentive contracts. · 16.405-2 Cost-plus-award-fee contracts. →

Rule changes for FAR Part 16

Source: eCFR, 48 CFR chapters 1 and 2 (GPO GovInfo bulk data) ↗. Plain words for the terms: glossary.

FAR 16.405-1 Cost-plus-incentive-fee contracts · SpendQuery