(a) Most incentive contracts include only cost incentives, which take the form of a profit or fee adjustment formula and are intended to motivate the contractor to effectively manage costs. No incentive contract may provide for other incentives without also providing a cost incentive (or constraint).

(b) Except for award-fee contracts (see 16.404 and 16.401(e)), incentive contracts include a target cost, a target profit or fee, and a profit or fee adjustment formula that (within the constraints of a price ceiling or minimum and maximum fee) provides that-

1. (1) Actual cost that meets the target will result in the target profit or fee;

2. (2) Actual cost that exceeds the target will result in downward adjustment of target profit or fee; and

3. (3) Actual cost that is below the target will result in upward adjustment of target profit or fee.