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4.70.20.15. Cost Reimbursable with Incentive Fee

  1. A cost reimbursable with incentive fee basis of payment reimburses the contractor for costs incurred in performance of the work, as determined by government audit, and adds a fee which is adjusted by formula in accordance with the relationship that total allowable actual costs bear to a predetermined target.
  2. Use this basis of payment when the criteria required for a firm price basis of payment are lacking and the goods and services being acquired are of a nature that the assumption by the contractor of a degree of cost responsibility is likely to provide a positive incentive for effective cost control and contract performance.
  3. When a cost reimbursable with incentive fee basis of payment is used, it is necessary to negotiate in advance a target, a target fee, a maximum fee and a formula for fee adjustment.
  4. The target should be the estimated costs of performing the work, computed in accordance with Contract Cost Principles 1031-2, assuming the contractor's current efficiency trend is maintained.
  5. The target fee, based on the target cost, and the maximum fee should be an amount no greater than that calculated in accordance with the procedures for profit determination.
  6. The formula provides for both an increase in fee above the target fee, up to the maximum fee, based on a sharing between the contractor and Canada of any decrease in actual acceptable costs below the target, and a decrease in the fee below the target fee, based on a sharing between the contractor and Canada of any increase in actual acceptable costs above target.
  7. Contracts or parts of contracts with this basis of payment should not include a ceiling price, which requires agreement between the parties as to what constitutes the prescribed work, since this conflicts with the reason why this basis of payment is being used in the first place, that is, the fact that a realistic statement of work cannot be submitted by the contractor.
  8. In contracts or parts of contracts with this basis of payment, which do not include a ceiling price, it is mandatory that a limitation of expenditure be made a term of the contract by including in the contract SACC Manual clause  C6001C.
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