What are some examples of cost reimbursable incentive and firm fixed incentive contracts? How can we explain a complex high profile requirement on incentives contract in simply terms to a person not contracting, such as commanders?
In FPIF, there's a ceiling price, the buyer will never pay above this price. The seller's profit decreases as the costs rises above the target cost. Once it hits the PTA, the buyer will no longer share the cost overrun, any cost overrun from that point onward will be totally absorbed by the seller. If the cost overrun goes beyond the ceiling price, the seller will suffer a loss.
In CPIF, there's no ceiling price but there's a range for the incentive (min and max). The seller's profit will decrease as the cost increases above the target cost till it hits the min profit, by which point the buyer assume all costs and pays only min fee; likewise for underrun but in the opposite direction.
We found a useful powerpoint presentation that you may find helpful. Attaching for your reference.