A Fixed-Price Incentive-Fee (FPIF) Contract is a contract type where the buyer pays the seller a fixed amount, as defined in the contract, and the seller can earn an additional incentive fee if they meet specific performance criteria. This contract structure encourages efficiency, cost control, and quality delivery.
Key Aspects of FPIF Contracts
- Base Price Is Fixed – The contract establishes a minimum guaranteed payment.
- Performance-Based Incentives – The seller can receive additional compensation for meeting or exceeding predefined goals.
- Encourages Cost & Schedule Efficiency – Sellers are motivated to control expenses and deliver early.
- Used for Performance-Sensitive Projects – Common in construction, IT, and government contracts.
FPIF Contract Structure
| Component | Description |
|---|---|
| Fixed Price | The base amount the buyer agrees to pay the seller. |
| Target Cost | The estimated cost of the work that both parties agree upon. |
| Incentive Fee | A bonus awarded if the seller meets performance goals (e.g., cost savings, early delivery, quality standards). |
| Share Ratio | Defines how cost savings or overruns are shared between the buyer and seller. |
Example Scenarios
Software Development
A company contracts a vendor for a $200,000 software project, with an incentive of $20,000 for early delivery.
Construction Project
A government agency awards a bridge construction contract with a base price of $5 million and a performance bonus of $500,000 if the project is completed ahead of schedule.
Manufacturing
A military supplier is given an FPIF contract for jet engines, where cost savings beyond the target budget are shared 60/40 between the buyer and seller.
Mermaid Diagram: FPIF Contract Flow
graph LR; A["Buyer & Seller Agree on Contract"] --> B["Fixed Price Defined"] B --> C["Target Cost Established"] C --> D{"Performance Criteria Met?"} D -->|Yes| E["Seller Earns Incentive Fee"] D -->|No| F["Seller Receives Fixed Price Only"]
Why Fixed-Price Incentive-Fee Contracts Matter
- Encourages Cost Control – Sellers are motivated to stay within budget.
- Drives High-Quality Performance – Incentivizes meeting or exceeding expectations.
- Balances Risk & Reward – Reduces buyer risk while rewarding efficiency.
- Supports Large-Scale Projects – Common in government and high-value contracts.
See also: Firm-Fixed-Price (FFP) Contract, Cost-Plus-Incentive-Fee (CPIF) Contract, Time & Materials (T&M) Contract, Procurement Management.