Content
Pricing - Target Cost Incentive Fee
This page is an extract from the full topic guidance on Pricing – Target Cost Incentive Fee (TCIF) [44KB PDF]. It details any Constraints associated with pricing - TCIF, provides a summary of the Authoritative Guidance and lists any essential reading, further reading or associated documents.
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A Target Cost Incentive Fee (TCIF) pricing arrangement
may be used in both non-competitive and competitive situations.
It provides a powerful incentive to contractors to
reduce costs and final prices while maintaining profit margins at reasonable
levels providing the Target Cost (TC) is set at a challenging but achievable
level.
It is generally more appropriate for longer duration,
higher value contracts where there may be opportunities to benefit from
continuous cost improvement.
TCIF has behavioural as well as economic benefits. It is
consistent with the More Effective Contracting (MEC) strategy and other
initiatives that seek to change cultures and improve the way the Ministry of Defence (MOD) and Industry
work together to deliver defence capability.
TCIF arrangements should be considered where:
- the difference between the mean cost outturn and the highest cost
outturn (at 95% confidence) is greater than 10% but still less than 25%;
- the risks can be 'owned' and quantified in monetary terms; and
- both parties have confidence in the outcome of a price within a
particular range.
MOD's preference is for a Maximum Price Target Cost (MPTC) arrangement.
Change can be a difficult aspect of TCIF and to ease its
operation consideration may be given to pricing change outside the TCIF
arrangement when appropriate.
Essential Reading
MOD / Industry Commercial Policy Steering Group (CPSG) Guideline No 7 - Target Cost Incentive Fee Arrangements
Further Reading
DEFCON Guide No 5 (Edition March 1979) Incentive (Target Cost) Contracting [288KB DOC]
More Effective Contracting topic
Pricing - Equality Of Information topic
Pricing - Post Costing topic (for information on the submission of Cost Certificates and Cost Summaries)
Pricing - Government Profit Formula topic (for information on the submission of Cost Certificates and Cost Summaries)
DEFCON Guide No 1 [240KB DOC]
DEFCON Guide No 2 [34KB PDF]
