Which type of contract adjusts the fee based on allowable costs to target costs?

The type of contract that adjusts the fee based on allowable costs related to target costs is the cost-plus incentive fee contract. This contract structure allows the contractor to be reimbursed for allowable incurred costs, but with an additional fee that is contingent on achieving certain performance targets. The fee is typically structured to encourage cost savings; as the contractor reduces costs below the target, they may receive a higher percentage of the savings as an incentive. This fosters a collaborative approach where the contractor is motivated to manage costs efficiently while still ensuring quality and timely delivery.

In contrast, other types of contracts do not offer the same flexibility or incentive alignment. For example, a cost-plus fixed fee contract provides a fixed fee that does not adjust based on performance metrics or cost savings, while a time and materials contract pays for the actual hours worked and materials used without any incentive for cost efficiency. A firm-fixed price contract, on the other hand, has a set price that does not change with the contractor's costs or performance, eliminating any flexibility for adjusting fees based on cost management. Thus, the cost-plus incentive fee contract uniquely provides a mechanism for adjusting fees based on the cost performance, aligning the interests of both the contractor and the government agency.