In a cost-plus incentive contract, what does the sharing ratio define?

In a cost-plus incentive contract, the sharing ratio specifically defines how the costs incurred by the contractor will be shared between the contractor and the purchaser, as well as how any savings achieved are divided between both parties. This concept allows both parties to have a clear understanding of their financial responsibilities and benefits in relation to the contract.

The sharing ratio is critical because it establishes the incentives for the contractor to control costs and improve efficiency. A well-structured sharing ratio encourages collaboration, as the contractor is motivated to minimize costs since they will share in any cost savings realized while still ensuring that the purchaser retains oversight of expenditures.

This understanding of cost and benefit allocations means that both parties stand to gain from efficient management of the project. The correct answer captures the essence of the sharing ratio in fostering a mutually beneficial arrangement that aligns the financial interests of both the contractor and the purchaser.