Section 3-122-138 - Cost-incentive contract(a) The cost-incentive contract provides for the reimbursement to the contractor of allowable costs incurred up to the ceiling amount and establishes a formula whereby the contractor is rewarded for performing at less than target costs or is penalized if it exceeds target cost.(b) The profit or fee under the contract will vary inversely with the actual, allowable costs of performance and consequently is dependent on how effectively the contractor controls cost in the performance of the contract.(c) The fixed-price cost incentive contract is one type of cost incentive contract. The parties establish at the outset a target cost, a target profit, a formula which provides a percentage increase or decrease of the target profit depending on whether the actual cost of performance is less than or exceeds the target cost, and a ceiling price. After performance of the contract, the actual cost of performance is arrived at based on the total incurred allowable costs as determined in accordance with subchapter 15 and as provided in the contract. The final contract price is then established in accordance with the formula using the actual cost of performance. The final contract price may not exceed the ceiling price. The contractor is obligated to complete performance of the contract, and, if actual costs exceed the ceiling price, the contractor suffers a loss. The fixed-price cost incentive contract serves three objectives:
(1) It permits the establishment of a firm ceiling price for performance of the contract which takes into account uncertainties and contingencies in the cost of performance;(2) It motivates the contractor economically since cost is in inverse relation to profit--the lower the cost, the higher the profit; and(3) It provides a flexible pricing mechanism for establishing a cost sharing responsibility between the State and contractor depending on the nature of the goods, services, or construction being procured, the length of the contract performance, and the performance risks involved.(d) The cost-reimbursement contract with cost incentive fee is another type of cost-incentive contract. The parties establish at the outset a target cost, a target fee, a formula for increase or decrease of fee depending on whether actual cost of performance is less than or exceeds the target cost, with maximum and minimum fee limitations, and a cost ceiling which represents the maximum amount which the agency is obligated to reimburse the contractor. The contractor continues performance until the work is complete or costs reach the ceiling specified in the contract. After performance is complete or costs reach the ceiling, the total incurred, allowable costs reimbursed in accordance with subchapter 15 and as provided in the contract are applied to the formula to establish the incentive fee payable to the contractor. This type of contract gives the contractor a stronger incentive to efficiently manage the contract than a cost-plus-fixed-fee contract provides.(e) Prior to entering into any cost incentive contract, or any cost-reimbursed contract with cost incentive fee, the procurement officer shall make the written determination required by section 3-122-137(g).[Eff 12/15/95; am and comp 11/17/97; am and comp MAR 21 2008] (Auth: HRS §§ 103D-202, 103D-313) (Imp: HRS § 103D-313)