Award Fee Contracts (FAR Part 16.4) are a type of Incentive Contract to incentivize the contractor to achieve cost efficiency. These can be a written contract or special incentives. These are appropriate when elements of performance cannot be objectively or quantitatively measured and areas of management interest or concern, which the Government wants to incentivize, may change over the course of the contract.

Purpose of Award Fee Contracts

The purpose of an Award fee (Incentive) contract is to motivate the contractor to deliver a better product or service. They are designed to obtain specific acquisition objectives by:

•  Establishing reasonable and attainable targets that are clearly communicated to the contractor; and
• Including appropriate incentive arrangements designed to motivate contractor efforts that might not otherwise be emphasized and
• Discourage contractor inefficiency and waste.

Types of Award Fee (Incentive) Contracts

There are a number of incentive contract types that are detailed by FAR Subpart 16.4 “Incentive Contracts”.  These include: (also see Incentive Contracts)

1. Fixed-price incentive contracts
2. Fixed-price contracts with award fees
3. Cost-plus-incentive-fee contracts
4. Cost-plus-award-fee contracts

1) Fixed-price incentive contract

A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of the total final negotiated cost to the total target cost. The final price is subject to a price ceiling, negotiated at the outset.

2) Fixed-price contracts with award fees

Award-fee provisions may be used in fixed-price contracts when the Government wishes to motivate a contractor and other incentives cannot be used because contractor performance cannot be measured objectively. Such contracts shall establish a fixed price (including normal profit) for the effort. This price will be paid for satisfactory contract performance. Award fee earned (if any) will be paid in addition to that fixed price.

3) Cost-plus-incentive-fee contracts

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.

4) Cost-plus-award-fee contracts

A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of (1) a base amount fixed at the inception of the contract, if applicable and at the discretion of the contracting officer, and (2) an award amount that the contractor may earn in whole or in part during the performance and that is sufficient to provide motivation for excellence in the areas of cost, schedule, and technical performance.

When developing the award fee strategy, the Government should consider interrelated factors such as the dollar value, complexity, and criticality of the acquisition; the availability of Government resources to monitor and evaluate performance, and the benefits expected to result from such Government oversight. Contracts containing an award fee arrangement require significant additional administrative and management effort and should only be used when the contract amount, performance period, and expected benefits warrant the cost of the additional administrative and management effort.

AcqNotes Tutorial

Other Types of Contracts

– See Firm-Fixed Price Contract
– See Incentive Contract
– See Cost-Reimbursement Contract

AcqLinks and References:

• Website: FAR Subpart 16.4 – Incentive Contracts
• OSD Memo Award Fee – 29 March 06
• DFARS Subpart 216.4 – Incentive Contracts
• Guide: Air Force Award Fee Guide – March 2002
• Guide: Navy-Marine Corp Award Fee Guide –  July 2004
• Website: FAR Part 16 – Types of Contracts

Updated: 5/2/2022

Rank: G1