Which type of contracts involve targets and profit adjustments?

Incentive contracts are designed to align the interests of both the contractor and the government by providing financial incentives for the contractor to control costs and meet performance targets. These types of contracts include specific targets for performance, such as cost savings or schedule adherence, and allow for adjustments in profit based on how well those targets are met.

If the contractor can complete the work under budget or achieve specific milestones early, they may receive a bonus or additional profit share. Conversely, if costs exceed the target, the contractor's profit may be reduced. This structure encourages efficiency and high performance while addressing risks associated with cost fluctuations and delays.

Cost contracts do not inherently include target-based profit adjustments; their primary focus is on reimbursing allowable costs incurred by the contractor. Fixed-price contracts establish a set price and do not adjust based on performance metrics, while time and material contracts are based on actual costs plus a fee, lacking the performance incentive components typical of incentive contracts. Thus, the structure and intent of incentive contracts distinctly support the idea of targets and profit adjustments, making this the correct choice.