What key components characterize an incentive contract?

An incentive contract is characterized by several key components that encourage parties to work towards cost efficiency and mutual benefits. The inclusion of a target cost is critical, as it establishes a benchmark for what the total project costs should be. A maximum price helps to cap the expenses, providing both parties with a safety net against excessive costs. Profit-sharing agreements further enhance collaboration by allowing both the buyer and seller to share in the financial success of the project, particularly if costs are kept below the target level. This combination motivates both parties to be more efficient and cost-effective, aligning their interests for better performance and outcomes.

Other options do not properly encompass the essence of what an incentive contract aims to achieve, leaving out essential elements such as the integration of cost management and collaborative profit-sharing.