An incentive agreement, also called an incentive type agreement, is a type of contract that refers to fixed price or cost reimbursement, where there is an option of adjustment of the fixed price or fee. The agreements offers a target price or fee which is only tentative and provides for a maximum price and or minimum fee to be adjusted at the end of the agreement to create a final price or fee depending on the costs incurred by the contractor in addition to a sliding scale of profit that is varies directly if it is a cost underrun, or inversely if it is a cost overrun, with the difference between the agreement amount and the maximum cost allowed in the contract.
It thus motivates the contractor and makes him responsible for his work and because the amount of profit or fee depend on the actual performance of the contractor. It also helps to create technical and financial targets for the contractor.
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