Which type of contract typically includes a formula for adjusting profit based on costs incurred?

The type of contract that includes a formula for adjusting profit based on costs incurred is the cost-plus-incentive-fee contract. This contract structure is designed to motivate the contractor to control costs while still allowing for some flexibility in terms of reimbursement for allowable costs.

In a cost-plus-incentive-fee contract, the contractor is reimbursed for their allowable costs and is also paid an additional amount as an incentive, which is typically based on the cost savings achieved. This profit is adjusted according to a predetermined formula that takes into account the contractor's performance in managing costs effectively. As project costs go down or as efficiencies are realized, the contractor can earn additional profits, incentivizing them to minimize costs without compromising the quality of work.

This structure contrasts with the other types of contracts listed, such as firm-fixed price, which set a specific price for the contract regardless of costs, and cost-plus-fixed-fee, where the contractor is paid for costs incurred plus a set fee that doesn't vary with performance. Time and materials contracts, on the other hand, provide compensation based on the actual hours worked and materials used, without a performance-based profit adjustment. Thus, the cost-plus-incentive-fee contract uniquely aligns the contractor's profit potential with their