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    I am looking for data that really has a clear, consistent explanation of what the share ratios represent as well as how to calculate the formulas using the share ratios that show what they Govt. would pay using the share ratio in a cost plus incentive fee arrangement. Also looking for policy or substantiated sources that would explain not only the above question but also the definition of the range of effectiveness and how to come support what it is. I have researched quite a bit on this topic and have only found disjointed, contradictory information and would like some help before negotiating my contract.


    Answer

    The website https://acc.dau.mil will take you to the DAU Acquisition Community Connection homepage.  From there, select the Cost, Price, and Finance (CPF) link and you will be directed to a page with many pricing resources, including help with Incentive Contracting.
     
    By selecting the Contract Pricing Reference Guides (CPRG) link, if you go to Volume IV, Advanced Issues, Chapter 1, Section 1.3.1., Structuring a Cost Incentive Pricing Arrangement, you will find the guidance on how to put together a CPIF deal.
     
    Also on the CPF link, there is a link to a “FPIF/CPIF Grapher” excel based tool that will help you perform “what if” sensitivity analysis of impacts of various share lines, targets, and minimum and maximum fees.  It will also draw a graph of the incentive arrangement.  Instructions on how to use the tool are contained in the Intro tab of the Excel workbook.
     
    For an in-depth discussion about Incentive Contracting, you may go to the hot link on the CPF page for the “DOD and NASA Guide:  Incentive Training Guide 1969”.  This guide is written at a very in-depth level and may require several reads to fully comprehend.
     
    It’s curious that you stated in your question that NAVAIR policy guidance that you “must use a 50/50 share ratio and know the range of incentive effectiveness”.  Reading of the above suggested CPRG chapter should explain the Range of Incentive Effectiveness (RIE), but the definition is “the range over which CPIF incentives can be expected to motivate contractor performance” (CPRG, Vol IV, Chapter 1, Section 1.3.1).  The graph toward the end of that section gives you a visual representation of the RIE.  In effect, the RIE is described by a lower limit, Optimistic cost (where fee is maximum); and a higher limit, Pessimistic cost, where fee is minimum).  Between the RIE points, the contractor is financially motivated to control costs by operation of the share lines.  Once the share lines turn flat, either below optimistic cost or above pessimistic cost where the slope of the line is 0, the contractor is not motivated any further to control costs.  Regardless of what costs are incurred, fee will not be affected.
     
    The Final Rule on the DFARS case that discussed this (DFARS Case 2011-D010) discusses the 50/50 share ratio and 120% ceiling as a point of departure for Fixed Price Incentive (Firm target) (FPIF) contracts.  The DFARS, nor PGI, make any mention of the 50/50 requirement for a Cost Plus Incentive Fee (CPIF) contract.  The interim rule had discussed the 50/50, 120% arrangement as a default position for FPIF contracts, but the final rule specifically addressed using that position as a point of departure and added “each acquisition situation must be evaluated in terms of the degree and nature of risk presented in order to select the proper contract type” [PGI 216.403-1 (1)(i)]. (Emphasis added)  This is the policy at the Department of Defense level.  Your local policies may of course be more restrictive.

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