Question

Pricing Military Contracts The Pentagon is constantly seeking ways to procure the most effective combat equipment and systems at the lowest possible cost. A key element in most procurement contracts is a fixed fee based on a percentage of the full cost for the contract, plus a percentage fixed fee that is incentive-based. The latter is based on meeting contract deadlines and meeting or exceeding other contract performance measures. An actual Pentagon contract with Boeing involved a 10% fixed fee on cost incurred and another 5%-of-incentive award. Required Evaluate the compensation plan for this contract, with the fixed fee of 10% and the incentive fee of 5%. What do you think is the role of the incentive fee, and do you think it is too large or too small?

Answer 1

The compensation plan for this contract is appropriate as there will be incentive for the vendors and suppliers to meet contract deadlines and exceed other contract performance measures.

The fixed fee here is a fixed percentage of 10% of the full cost and incentive award is 5% which is a fixed fee. The compensation plan will incentivize Boeing to bring the project under budget. In this case Boeing will be paid a fixed fee of 10% of costs and a reward fee of 5%.

Thus the role of the incentive fee will be to spur Boeing to optimally try and meet deadlines and meet and even exceed different performance measures that are applicable and relevant to this contract. The amount of 5% is appropriate and is certainly not too low. 5% will translate into a considerable absolute figure and this will be good enough material motivation for Boeing to increase its efficiency and productivity for this contract.