Certified Professional Contract Manager (CPCM) Practice Exam 2025 - Free CPCM Practice Questions and Study Guide

A fixed price incentive contract with a firm target is characterized by its clear structure that includes a specified target cost, target profit, and a price ceiling. This type of contract is designed to provide financial incentives to the contractor to control costs while ensuring that the government or buyer has predictable limits on maximum expenditures.

The target cost is the anticipated expense of executing the contract, and the target profit is the profit the contractor aims to make if they meet the target cost. The price ceiling, on the other hand, sets an upper limit on the total payment the contractor can receive, which protects the buyer from unexpectedly high costs. This structure promotes efficiency since contractors are encouraged to control their costs to maximize their profits while staying under the ceiling price.

By contrast, other types of contracts lack this combination of features. For example, contracts with fluctuating ceiling prices or unlimited price adjustments do not provide the same level of cost predictability and incentives for cost control. Furthermore, the misconception that such contracts are used exclusively for government contracts overlooks their applicability in commercial settings as well.