Multiple Incentive Contracts Result in Increased Costs—Or Do They?

Abstract

Department of Defense (DoD) incentive contracts usually contain a predetermined formula for profit or fee adjustment based upon the actual cost outcome. Additional incentives can also be included, provided that a cost incentive (or constraint) also exists. Historically, DoD incentive contracts containing multiple incentives exceeded their cost targets 20% more frequently than those containing only a cost incentive. The author conducted a factor analysis to compare incentive contract outcomes between the DoD and other government agencies to determine if any underlying factors exist. One factor identified that the frequency in which schedule incentives and penalties are utilized is agency-centric, and increased use correlates to better schedule outcomes. Moreover, cost outcomes are not associated with that factor. The non-DoD agencies in this sample used predetermined cost constraints coupled with schedule incentives and/or penalties versus cost-plus incentive/fixed-price incentive (CPI/FPI) cost sharing structures with additional incentives.