A FPI contract provides for adjusting profit and establishing the final price by applying a formula based on the relationship between the total final negotiated cost and total target cost. An FPI contract specifies:
The price ceiling is the maximum that may be paid to the supplier, excluding adjustments specifically provided for under contract clauses. When performance is completed, the final cost is redetermined by applying the final negotiated rates to the incurred costs. When the final cost is less than the target cost, applying the formula results in a profit greater than the target profit; when the final cost is more than the target cost, applying the formula results in a profit less than the target profit. If the final redetermined cost exceeds the ceiling, the supplier absorbs the difference. The profit varies inversely with the cost, so this type of contract provides a positive, calculable profit incentive for the supplier to control costs.
FPI contracts should be used when:
All FPI contracts must include Clause 2-27: Incentive Price Revision.
