What does the term "Target Fee" refer to in a cost-plus incentive contract?

In a cost-plus incentive contract, the term "Target Fee" specifically refers to the profit element that a contractor can earn if the actual costs of the project align with the predetermined target costs. This type of contract is structured to motivate the contractor to manage costs effectively while still ensuring that they cover their expenses. If the actual costs are exactly equal to the target costs, the contractor receives the target fee as their profit.

This incentivizes the contractor to complete the project within budget and provides them with a financial reward for efficiency. It aligns the interests of both the client and the contractor, encouraging collaboration to minimize costs without compromising quality. By setting a target, it also allows for flexibility; if costs exceed the target, the contractor might not receive the full fee, but if they come in under budget, they may benefit further, depending on the specific structure of the contract.