Cost Management 6th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 22

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 fixed fee based on percentage of 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. A recent Pentagon contract with Boeing involves a 10 percent fixed fee on cost incurred and another 5-percent-of-incentive award.
Required Evaluate the compensation plan for this contract, with the fixed fee of10 percent and the incen­tive fee of 5 percent. What do you think is the role of the incentive fee, and do you think it is too large or too small