FAR 16.405-2—Cost-plus-award-fee contracts.
Plain-English Summary
FAR 16.405-2 defines the cost-plus-award-fee (CPAF) contract type and explains its basic fee structure: a cost-reimbursement contract with a fixed base fee, if the contracting officer chooses to include one, plus an award fee that the contractor can earn in whole or in part during performance. The section also ties CPAF use to FAR 16.401(e), which contains the broader requirements for using cost-reimbursement contract types. In practical terms, this section is about how the Government can motivate superior contractor performance when outcomes are difficult to define in advance, especially in areas such as cost control, schedule adherence, and technical performance. It matters because the award-fee approach gives the Government discretion to evaluate performance over time and pay more for excellence, while still reimbursing allowable costs under a cost-reimbursement structure. Contractors need to understand that the fee is not guaranteed and depends on performance against the award-fee criteria, and contracting officers must structure the arrangement carefully so the fee actually drives the desired behavior.
Key Rules
Cost-reimbursement contract type
A cost-plus-award-fee contract is a form of cost-reimbursement contract. The Government reimburses allowable costs and pays fee separately, rather than using a fixed-price structure.
Base fee may be included
The contract may include a base amount fixed at inception, but only if applicable and at the contracting officer’s discretion. The base fee is not mandatory under this section.
Award fee is performance-based
The award amount is earned in whole or in part during performance based on the contractor’s results. It is intended to reward excellence rather than simply compensate for effort or cost incurred.
Must motivate excellence
The award fee must be sufficient to motivate superior performance in cost, schedule, and technical areas. The structure should create a meaningful incentive, not a nominal or symbolic one.
Must satisfy FAR 16.401(e)
Use of this contract type is subject to the requirements in FAR 16.401(e). That means the contracting officer must ensure the broader cost-reimbursement contract requirements are met before selecting CPAF.
Responsibilities
Contracting Officer
Decide whether a base fee is appropriate, structure the award-fee arrangement, and ensure the contract complies with FAR 16.401(e). The contracting officer must also make sure the award-fee amount and criteria are designed to motivate excellence in cost, schedule, and technical performance.
Contractor
Perform to the award-fee criteria and manage work in a way that supports strong cost, schedule, and technical outcomes. The contractor should understand that the award fee is earned only in whole or in part based on performance.
Agency
Use the CPAF structure only when it is appropriate for the acquisition and when the broader cost-reimbursement requirements are satisfied. The agency should support a performance evaluation approach that can credibly distinguish excellent performance from merely acceptable performance.
Practical Implications
Award fee is not automatic: contractors should not assume they will receive the full fee, or any fee beyond the base amount, unless performance supports it.
The criteria must be meaningful: if the award-fee plan does not clearly reward cost, schedule, and technical excellence, the incentive effect is weakened and the contract may be poorly structured.
Contracting officers need to be deliberate about the base fee: including one is optional, so the decision should reflect the acquisition strategy and the level of risk the Government wants to share.
This contract type works best when performance is hard to define upfront: it is commonly used where subjective evaluation of results is necessary, but that also increases the need for disciplined administration.
Poorly written evaluation plans create disputes: vague standards, inconsistent scoring, or weak documentation can undermine the award-fee process and lead to contractor dissatisfaction or protest risk.
Official Regulatory Text
A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of (1) a base amount fixed at inception of the contract, if applicable and at the discretion of the contracting officer, and (2) an award amount that the contractor may earn in whole or in part during performance and that is sufficient to provide motivation for excellence in the areas of cost, schedule, and technical performance. See 16.401 (e) for the requirements relative to utilizing this contract type.