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Chapter 15: Contracts and governance as ... > Incentive contracts
Incentive contracts, often referred to as ‘target cost’ or ‘cost-plus-incentive-fee’ contracts, offer the possibility of sharing uncertainty between the client and the contractor and an intermediary position between fixed price and CPFF contracts. Sharing uncertainty implies sharing both opportunity and risk in a related manner. This is potentially a more opportunity efficient alternative for both the client and the contractor.
In the simplest form of incentive contract, where
C = the actual project cost (which is uncertain at the start of the project),
E = target cost,
b = the sharing rate, 0 < b < 1,
F = the target profit level,
and E, b and F are fixed at the commencement of the contract, payment by the client to the contractor is