FPI (Fixed-Price Incentive)

What is a Fixed-Price Incentive (FPI) contract?

A Fixed-Price Incentive contract is a middle ground between a firm-fixed-price deal and a cost-reimbursement deal. Instead of one locked price, it sets a target cost, a target profit, a ceiling price, and a share ratio. The contractor's final profit moves with how actual cost compares to the target, which gives both sides a stake in controlling cost.

How the numbers work

If the contractor comes in under the target cost, the savings are split between the contractor and the government according to the share ratio, so the contractor earns more profit. If the work runs over, the parties share the overrun the same way, cutting into profit. This continues until cost hits the ceiling price, beyond which the contractor bears every additional dollar. That ceiling is the contractor's real risk line.

When and why it is used

The government reaches for FPI when a requirement is well enough understood to estimate but still carries enough uncertainty that a firm-fixed-price would force everyone to pad their bids. It is common on production and development work. For a contractor, the keys are a realistic target cost and a clear-eyed view of the ceiling, since the share ratio rewards genuine cost discipline but punishes optimistic estimating. Compare it with simpler ceilings like a not-to-exceed arrangement to see where cost risk really sits.