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  • Question

    What is the difference between a cost incentive and cost constraint as it pertains 16.402?


    Answer

    FAR Part 16.402 deals with the application of predetermined, formula   type incentives used in fixed price incentive, FPIF, fixed price with award fees, cost-reimbursement incentive, CPIF, or CPAF Contracts. Per FAR 16.402-1, a cost incentive, which can take the form of a profit or fee adjustment, is intended to motivate the contractor to control its cost.  If the contractor keeps its cost down its profit/fee will be higher or adjusted upward as in the case of a FPIF Contract. 

    In contrast, if the contractor does a poor job
    controlling its costs its profit/fee would be lower or adjusted downward. The FAR/DFARs does not define a cost constraint. However, Webster Dictionary defines a constraint as a limitation or restriction. An example of a cost constraint in the context of FAR 16.402 would be the ceiling price on a FPIF   Contract. The ceiling price is a cost constraint because the Government will   not pay the contractor more than the ceiling price on a FPIF Contract. 

    In
    summary, a cost incentive motivates the contractor to control its costs while a cost constraint restricts or limits how much the contractor can get paid. Since we do not have all of the facts particular to your contract, program, and situation, we highly recommend that you consult with your Contracting Officer and Legal Office for further guidance.
     

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