What risk does a fixed-price incentive contract allow contractors to assume?

A fixed-price incentive contract is structured to provide contractors with a certain level of cost certainty while also incentivizing them to manage costs effectively. Under this type of contract, the contractor assumes a negotiated share of the risk related to performance and cost overruns. The incentive allows for shared savings between the contractor and the client, promoting efficiency and cost management.

The essence of a fixed-price incentive contract is that it balances risk between the contractor and the client. The contractor benefits from remaining under budget, while the client retains control over costs by setting a price that may include incentives for better performance. Thus, this arrangement is designed to motivate the contractor to perform efficiently, knowing that any cost savings below the initially agreed-upon price can lead to additional profit for the contractor.

This understanding reflects the collaborative nature of a fixed-price incentive contract, which is about sharing risk instead of transferring it entirely or ignoring it. The successful negotiation of these shared risks is crucial to align the interests of both parties, thereby making the selected answer accurate in capturing the essence of what risk is allowed to be assumed under such a contract.