What is target price contract
A Fixed-Price Incentive (Firm Target) (FAR 16.403-1) contract specifies a target cost, a target profit, a price ceiling (but not a profit ceiling or floor), and a profit adjustment formula.These elements are all negotiated at the outset. The price ceiling is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses. INTRODUCTION TO TARGET PRICE CONTRACTS Contractor gains a bonus if the actual cost is below the target cost but shares the cost if he goes above the target cost. Until Completion the Contractor is reimbursed for all costs. Gives the Contractor incentive to minimise costs. Compensation events can adjust the target price. Here’s an example. Say you have a contract with a target cost of $400,000, a price ceiling of $460,000, a target fee of $40,000, and an 80/20 share ratio. In this case, the price ceiling is the fixed price part. Regardless of the total cost, the buyer won’t pay more than $460,000