An examination of the effects that incentive contracts may have on contract costs and an inquiry into the validity of the cost savings commonly attributed to these contracts. It is commonly assumed that incentive contracts provide an entrepreneurial motivation for increased efficiency and tighter cost control. Yet, given present procurement practices, it is unlikely that incentive contracts have any real effect on costs or efficiency. Many incentive contracts continue to be awarded without meaningful price competition, and there can be no guarantee that the negotiated targets are sufficiently close to contractors' expected costs to provide any incentive for increased efficiency. Realistic targets are needed to make these contracts more effective. Future gains in incentive contracting are likely to come through better ways of obtaining cost targets--increased competition and improved methods of cost estimation. 16 pp.