In a cost-plus incentive contract, what happens if actual costs exceed target costs?

In a cost-plus incentive contract, if the actual costs exceed the target costs, the contractor is responsible for absorbing the excess costs. This type of contract gives the contractor a base fee plus an additional fee based on the cost savings they generate. When actual costs surpass the target costs, the financial risk primarily rests with the contractor, incentivizing them to manage costs effectively.

This structure encourages efficiency and good management practices since the contractor is motivated to control and reduce costs to maximize their profit margin. Therefore, when faced with exceeding expenses, the contractor cannot pass those additional costs onto the client; they must cover them from their own resources. This aspect of cost-plus incentive contracts is critical for establishing clear expectations around financial responsibilities, motivating contractors to complete projects within budget constraints while still being rewarded for effective cost management.