Incentive Contracts

Examination of Fixed-Price Incentive Contracts Gao ID: NSIAD-88-36BR November 3, 1987

In response to a congressional request, GAO examined the federal government's practice of using fixed-price incentive (FPI) contracts to share cost risks with its contractors, to determine its cost-effectiveness.

GAO reviewed 573 FPI contracts at 6 Department of Defense (DOD) purchasing offices and found that: (1) DOD had given final pricing to 62 contracts; (2) of the 62 contracts, 2 achieved the target price, 33 overran the target price, and 27 underran the target price; and (3) none of the 6 purchasing offices exceeded their cumulative target price by more than 1.76 percent. GAO also found that: (1) there was no relationship between the cost-sharing ratio and achievement of a contract's target price; (2) although the FPI contracts did not always achieve the desired goal, they enabled the government to share financial risks with contractors and limited its financial liability; (2) government contractors often refuse to accept firm-fixed-price contracts because of the associated risks; and (3) the government would have to use cost-type contracts if it could not partially share risk through FPI contracts.

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