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    1. What type of Contract warrants a "Ceiling Price"? 2. Does all Incentive type contracts have a Share Ratio?


    Question:  1.What type of Contract warrants a "Ceiling Price"?  2. Do all Incentive type contracts have a Share Ratio?
    Question Background: 1. I understand that Incentive type Contracts warrant ceiling price. Meaning CPIF, FPIF. The key is the "I" for Incentive. 2. I'm assuming that Incentive type contracts always have a Share Ratio.
    Answer to question 1:  The term “ceiling price” is used with Fixed Price Incentive type contracts as the following Federal Acquisition Regulation (FAR) references indicate:

    16.201 -- General.

    Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances. 

     16.206 -- Fixed-Ceiling-Price Contracts with Retroactive Price Redetermination.

    16.206-1 -- Description.

    A fixed-ceiling-price contract with retroactive price redetermination provides for --

    (a) A fixed ceiling price; and
    (b) Retroactive price redetermination within the ceiling after completion of the contract.
    16.206-2 -- Application.
    A fixed-ceiling-price contract with retroactive price redetermination is appropriate for research and development contracts estimated at $150,000 or less when it is established at the outset that a fair and reasonable firm fixed price cannot be negotiated and that the amount involved and short performance period make the use of any other fixed-price contract type impracticable.
    (a) A ceiling price shall be negotiated for the contract at a level that reflects a reasonable sharing of risk by the contractor. The established ceiling price may be adjusted only if required by the operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.
    (b) The contract should be awarded only after negotiation of a billing price that is as fair and reasonable as the circumstances permit.
    (c) Since this contract type provides the contractor no cost control incentive except the ceiling price, the contracting officer should make clear to the contractor during discussion before award that the contractor’s management effectiveness and ingenuity will be considered in retroactively redetermining the price.

    16.403 -- Fixed-Price Incentive Contracts.

    (a) Description. 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 total final negotiated cost to total target cost. The final price is subject to a price ceiling, negotiated at the outset. The two forms of fixed-price incentive contracts are firm target and successive targets, as further described in 16.403-1 and 16.403-2.

    The use of a fixed price contract requires the contractor to meet the terms and conditions of the contract, regardless of the ultimate costs incurred, for the price specified in the contract. On the other hand, cost contracts require the contractor’s best effort to meet the contract requirements and the government pays all reasonable, allowable, and allocable costs incurred by the contractor in their effort to meet the requirements of the contract.  Therefore, cost type contracts do not establish ceiling prices.  However you will find the use of the term “ceiling” used in cost contracts to refer to an amount of costs that the contractor cannot exceed without the approval of the contracting officer (see below), but once a higher ceiling is approved and funded, the government will pay all costs up to the ceiling.  If the cost ceiling isn’t increased, the contractor is not obligated to perform further.

    16.301-1 -- Description.

    Cost-reimbursement types of contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer.
    Answer to question 2:  FAR 16.4 describes the various incentive contract types.  An incentive can be used with any contract type and can be designed for the specific circumstances of each acquisition to incentivize the best performance by the contractor.  This being said the contract types that most commonly use share ratios are where cost is being incentivized through the use of the Fixed Price Incentive ( with either fixed and successive targets) or the Cost Plus Incentive Fee contract types.  Both of these contract types use a share ratio.  However, a contract arrangement designed to incentivize early delivery or increased performance could be used in other contract types and would not typically involve a share ratio.  Award fee contract types are also part of the incentive contract family but do not involve the use of a share ratio.

    Additional information on the use of incentive contracts can be obtained at the following ACQuipedia location:

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