What is FPI (Fixed-Price Incentive)?
Fixed-Price Incentive (FPI) contracts are a type of fixed-price contract used in government procurement that includes provisions for adjusting the profit based on the contractor’s performance in terms of cost, schedule, and technical performance. This contract type is designed to motivate contractors to manage costs effectively while meeting specified performance targets, offering a balance between risk and reward.
Key Features of Fixed-Price Incentive Contracts
Structure of FPI Contracts
FPI contracts typically consist of three main components:
- Target Cost: The estimated cost of the contract work.
- Target Profit: The profit that the contractor can earn if the work is completed at the target cost.
- Price Ceiling: The maximum price that the government will pay, regardless of the actual costs incurred.
Incentive Mechanism
The incentive in FPI contracts is structured to encourage cost savings and efficient performance. If the contractor can complete the work below the target cost, the savings are shared between the contractor and the government according to a predetermined formula. Conversely, if the costs exceed the target, the contractor’s profit is reduced, but the price ceiling limits the government’s financial exposure.
Benefits of FPI Contracts
- Cost Control: FPI contracts incentivize contractors to control costs and improve efficiency, as their profit is directly tied to their performance.
- Risk Sharing: These contracts balance the risk between the government and the contractor, encouraging both parties to focus on cost-effective solutions.
- Performance Focus: By linking profit to performance metrics, FPI contracts drive contractors to meet or exceed project objectives.
