13-36Pricing Military ContractsThe Pentagon is constantly seeking ways to procure the most effective combat equipment and systems at the lowest possible cost. A key element in most procurement contracts is a fixed fee based on a percentage of the full cost for the contract plus a percentage fixed fee that is incentive-based. The latter is based on meeting contract deadlines and meeting or exceeding other contract performance measures. An actual Pentagon contract with Boeing involved a 10% fixed fee on cost incurred and another 5% as an incentive award.

RequiredEvaluate the compensation plan for this contract, with the fixed fee of 10% and the incentive fee of 5%. What do you think is the role of the incentive fee, and do you think it is too large or too small?