Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 51

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