FAR 16.404—Fixed-price contracts with award fees.
Plain-English Summary
FAR 16.404 explains when and how the Government may use a fixed-price contract with an award fee. The section covers the basic purpose of award-fee provisions, the condition that they are appropriate only when the Government wants to motivate contractor performance but cannot use other incentives because performance cannot be measured objectively, and the pricing structure required for this contract type. It also ties the reader to FAR 16.401(e), which contains the broader requirements for using this contract type. In practice, this means the contract must still have a firm fixed price for the work itself, but the contractor may earn an additional award fee based on subjective evaluation of performance. The section is important because it limits award-fee use to situations where objective measures are not workable and prevents the award fee from replacing the underlying fixed-price structure.
Key Rules
Use only when objective measures fail
Award-fee provisions may be used in fixed-price contracts only when the Government wants to motivate the contractor and other incentives cannot be used because performance cannot be measured objectively. This makes award fee a fallback incentive tool, not a routine add-on.
Fixed price remains the base
The contract must establish a fixed price, including normal profit, for the effort. That fixed price is the amount payable for satisfactory performance and is not dependent on award-fee determinations.
Award fee is additional payment
Any award fee earned is paid in addition to the fixed price. The award fee is separate from the base contract price and is contingent on the Government’s evaluation of performance.
Satisfactory performance earns the base price
The fixed price covers satisfactory contract performance. The contractor should expect to receive the base price if it performs to the contract’s required standard, regardless of whether any award fee is earned.
Follow broader FAR requirements
This section expressly points to FAR 16.401(e) for the requirements governing use of this contract type. Users must read this section together with those additional requirements before selecting or administering the contract.
Responsibilities
Contracting Officer
Determine whether award-fee use is appropriate only when contractor performance cannot be measured objectively and other incentives are not suitable. Ensure the contract establishes a fixed price for the work, includes the award-fee structure properly, and complies with FAR 16.401(e).
Agency
Use award-fee fixed-price contracts only in circumstances that justify the incentive approach and support the required evaluation process. Ensure internal policies and approvals, if any, are followed before selecting this contract type.
Contractor
Perform the work to at least the level required for satisfactory performance to earn the fixed price. Understand that any award fee is discretionary and depends on the Government’s evaluation of performance against the award-fee criteria.
Practical Implications
Award-fee fixed-price contracts are meant for situations where subjective judgment is necessary, not where measurable performance metrics are available.
The contractor’s base payment should not be confused with the award fee; the fixed price is owed for satisfactory performance, while the award fee is extra and performance-based.
A common pitfall is using award fee too broadly, especially when objective incentives or measurable standards could have been used instead.
Contracting officers should make sure the award-fee criteria and evaluation approach are consistent with the fixed-price nature of the contract and with FAR 16.401(e).
Contractors should focus on meeting the contract’s satisfactory-performance requirements first, then on maximizing performance in areas the Government will evaluate for award fee.
Official Regulatory Text
Award-fee provisions may be used in fixed-price contracts when the Government wishes to motivate a contractor and other incentives cannot be used because contractor performance cannot be measured objectively. Such contracts shall establish a fixed price (including normal profit) for the effort. This price will be paid for satisfactory contract performance. Award fee earned (if any) will be paid in addition to that fixed price. See 16.401 (e) for the requirements relative to utilizing this contract type.