incentive contract

Fixed price or cost reimbursement contract in which a target cost, price, or fee (profit) is used as a point of departure for various monetary-incentives (subject to a maximum amount). After completion of the contract, the incentive payment is computed on the basis of the contractor's actual cost plus a sliding scale of profit. The profit varies directly (in case of cost underrun) or inversely (in case of cost overrun) with the difference between the contract cost and the maximum allowable cost. Also called incentive type contract.