A NOTE ON INCENTIVE FEE CONTRACTING

A hypothetical incentive fee contract for a missile is considered that includes factors of cost, time, weight, and reliability the missile is to be assembled from 10 components, each of which is to be manufactured under a subcontract. The main desire is to learn whether the incentive fee contract can reasonably be extended to the subcontractors. The following features are stressed as of importance in extending the incentive fee concept to subcontracts 1 If individual components have a strictly additive effect on the total project, then the incentive fee concept can be safely extended to subcontractors although for a weight case this may lead to some minor inequities. 2 If the performance of the total project is measured by that of the poorest of the components, then one must beware of substantial magnification effects. 3 If the performances of the components combine like independent probabilities to determine overall performance, the range of variability for individual components is severely restricted.