FAR 16.406—Contract clauses.
Plain-English Summary
FAR 16.406 tells contracting officers which contract clauses must be inserted when the Government uses incentive and award-fee contract types. It covers fixed-price incentive contracts under 52.216-16 (Incentive Price Revision-Firm Target) and 52.216-17 (Incentive Price Revision-Successive Targets), including when Alternate I must be used for supplies or services ordered under a provisioning document or Government option. It also addresses the cost-reimbursement clauses used with incentive and award-fee arrangements: 52.216-7 (Allowable Cost and Payment) for cost-plus-incentive-fee and cost-plus-award-fee contracts, and 52.216-10 (Incentive Fee) for cost-plus-incentive-fee contracts. Finally, it sets conditions for using an award-fee clause, requiring agency prescription or approval, compatibility with 52.216-7, and a clear statement that the award amount and award-fee methodology are unilateral Government decisions. In practice, this section ensures the solicitation and contract contain the correct clause structure for the chosen pricing arrangement, so the parties know how target prices, fee, award determinations, and payment administration will work.
Key Rules
Use firm-target clause
When a fixed-price incentive (firm target) contract is contemplated, the contracting officer must insert 52.216-16, Incentive Price Revision-Firm Target. If the contract includes supplies or services ordered under a provisioning document or Government option and those prices are subject to incentive price revision, Alternate I must be used.
Use successive-target clause
When a fixed-price incentive (successive targets) contract is contemplated, the contracting officer must insert 52.216-17, Incentive Price Revision-Successive Targets. If ordered supplies or services under a provisioning document or Government option are subject to incentive price revision, Alternate I is required.
Include allowable cost clause
For cost-plus-incentive-fee and cost-plus-award-fee contracts, the clause at 52.216-7, Allowable Cost and Payment, must be inserted as prescribed by FAR 16.307(a). This clause governs cost reimbursement, payment, and allowability administration.
Include incentive-fee clause
For cost-plus-incentive-fee contracts, the contracting officer must also insert 52.216-10, Incentive Fee, as prescribed by FAR 16.307(d). This clause establishes how the incentive fee is calculated and adjusted.
Award-fee clause must be approved
An award-fee clause may be used only if it is prescribed by or approved under agency acquisition regulations, is compatible with 52.216-7, and expressly states that the award amount and award-fee determination methodology are unilateral Government decisions made solely at the Government's discretion.
Responsibilities
Contracting Officer
Select and insert the correct clause based on the contemplated contract type; use the proper alternate when supplies or services are ordered under a provisioning document or Government option; ensure any award-fee clause meets the regulatory conditions and is consistent with allowable cost and payment requirements.
Agency
Prescribe or approve award-fee clauses through agency acquisition regulations and ensure those clauses are compatible with FAR 52.216-7 and the Government-discretion requirements.
Contractor
Review the solicitation and contract to understand the applicable incentive or award-fee structure, including how prices, fees, and award determinations will be administered and what payment rules apply.
Practical Implications
Clause selection is not optional: using the wrong clause, or omitting an alternate when required, can create administration problems and disputes over pricing or fee adjustments.
Award-fee arrangements require special care because the clause must make clear that the Government alone decides the award amount and the methodology for determining it.
For cost-reimbursement incentive and award-fee contracts, 52.216-7 is foundational; if it is not properly paired with the other clauses, payment and allowability issues can arise quickly.
When options or provisioning documents are involved, contracting officers must check whether Alternate I applies to the ordered items, not just the base contract.
Contractors should verify that the solicitation’s clause set matches the intended contract type before proposal submission, since the clause package drives risk allocation, payment mechanics, and fee potential.
Official Regulatory Text
(a) Insert the clause at 52.216-16 , Incentive Price Revision-Firm Target, in solicitations and contracts when a fixed-price incentive (firm target) contract is contemplated. If the contract calls for supplies or services to be ordered under a provisioning document or Government option and the prices are to be subject to the incentive price revision under the clause, the contracting officer shall use the clause with its Alternate I. (b) Insert the clause at 52.216-17 , Incentive Price Revision-Successive Targets, in solicitations and contracts when a fixed-price incentive (successive targets) contract is contemplated. If the contract calls for supplies or services to be ordered under a provisioning document or Government option and the prices are to be subject to incentive price revision under the clause, the contracting officer shall use the clause with its Alternate I. (c) The clause at 52.216-7 , Allowable Cost and Payment, is prescribed in 16.307 (a) for insertion in solicitations and contracts when a cost-plus-incentive-fee contract or a cost-plus-award-fee contract is contemplated. (d) The clause at 52.216-10 , Incentive Fee, is prescribed in 16.307 (d) for insertion in solicitations and contracts when a cost-plus-incentive-fee contract is contemplated. (e) Insert an appropriate award-fee clause in solicitations and contracts when an award-fee contract is contemplated, provided that the clause- (1) Is prescribed by or approved under agency acquisition regulations; (2) Is compatible with the clause at 52.216-7 , Allowable Cost and Payment; and (3) Expressly provides that the award amount and the award-fee determination methodology are unilateral decisions made solely at the discretion of the Government.