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    Is there any regulation that prohibits the offeror from proposing the maximum fee as its target fee? Is there any guideline to the target fee vs. maximum fee?


    Answer

    The short answer is there no regulation that prohibits an offeror from proposing a target fee the same as the maximum fee in a CPIF type contract.  Nor is there a rule that the contracting officer can or cannot accept and award a target fee equal to the maximum.  As far as guidance for target fee vs. maximum fee, the FAR states that the target cost and a fee adjustment formula be negotiated as to motivate the contractor to manage effectively (FAR 16.405-1(b)(1)(ii)).  Additionally, FAR 16.405-1(b)(3) says the fee adjustment formula should provide an incentive that will be effective over the full range of foreseeable variations from target cost and that if a high maximum fee is negotiated, a low minimum fee shall also be provided. Beyond that guidance, you can refer to any agency specific directives that may apply.

    Whether or not you should negotiate a contract where the target and maximum fee are the same is dependent on your particular contract action though, generally, that would seem to go against providing incentive over a full range of target cost variations.  As you stated, this scenario depicts there is no likelihood (nor incentive) that cost savings can be achieved above the estimated target (under run) since the target cost and optimistic cost would be the same.  The only cost incentive is to minimize any potential cost overrun beyond the target cost.  If you haven’t already done so, recommend you establish realistic target, optimistic and pessimistic cost scenarios that may give you a maximum fee greater than the target fee and therefore opportunity to incentivize cost under runs.

    Some additional resources that could assist you include:

    The Contract Pricing Reference Guides located at
    https://acc.dau.mil/CommunityBrowser.aspx?id=406579&lang=en-US, specifically Volume 4, Chapter 1.3 on structuring and applying incentive pricing arrangements.
    A FPIF/CPIF Grapher at https://acc.dau.mil/CommunityBrowser.aspx?id=462515&lang=en-US which provides graphical depictions of various incentive scenarios.

    As always, we encourage you to work with your contracting and legal office as well as referencing your agency specific regulations for any acquisition as we don't have all the facts or access to the contract files.



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