A Firm-Fixed-Price (FFP) (FAR Subpart 16.2) contract provides for a price that is not subject to any adjustment based on the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties. An FFP contract is not subject to any adjustment, whereas a Fixed Price Contract might have a provision for economic price adjustments.

Definition: A firm-fixed-price (FFP) contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract.

Firm-Fixed-Price (FFP) Incentives

The contracting officer may use a firm-fixed-price contract in conjunction with an Award-Fee Incentive (see FAR Subpart 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.

Benefits of using a Firm-Fixed-Price (FFP) Contract

The main benefit of using a firm-fixed-price contract is that the price agreement is guaranteed.  The contractor takes on all the risk to deliver within the price agreed in the contract. Any overages or deviations will have to be absorbed by the contractor. As a result, these contracts are very specific, what is being delivered and when. 

• Less risk to the government or buyer
• More risk to the seller or contractor
• Known pricing

When to use a Firm-Fixed-Price (FFP) Contract

An FFP contract is suitable for acquiring commercial items or for acquiring other supplies or services on the basis of reasonably definite functional or detailed specifications when the contracting officer can establish fair and reasonable prices at the outset, such as when: (FAR Subpart 16.202-2)

• There is adequate price competition;
• There are reasonable price comparisons with prior purchases of the same or similar supplies or services made on a competitive basis or supported by valid cost or pricing data;
• Available cost or pricing information permits realistic estimates of the probable costs of performance; or
• Performance uncertainties can be identified, and reasonable estimates of their cost impact can be made, and the contractor is willing to accept a firm fixed price representing the assumption of the risks involved.

Types of Fixed-Price (FFP) Contracts

There are a few different FP contracts that can be utilized. Make sure you choose the most appropriate FP contract for your program.

• Fixed-price contracts with economic price adjustment (16.203): A FFP contract with economic price adjustment provides for upward and downward revision of the stated contract price upon the occurrence of specified contingencies.
• Fixed-price incentive contracts (16.204): An FFP incentive contract is a fixed-price contract that adjusts profit and establishes the final contract price by a formula based on the relationship of the final negotiated total cost to the total target cost.
• Fixed-price contracts with prospective price redetermination (16.205): A FFP with prospective price redetermination provides for the initial period of contract deliveries or performance, Prospective redetermination, at a stated time or times during the performance, of the price for subsequent periods of performance.
• Fixed-ceiling-price contracts with retroactive price redetermination (16.206): A fixed-ceiling-price contract with retroactive price redetermination provides for fixed ceiling price Retroactive price redetermination within the ceiling after completion of the contract.
• Firm-fixed-price, level-of-effort term contracts (16.207): A firm-fixed-price, level-of-effort term contract requires The contractor to provide a specified level of effort over a stated period of time, on work that can be stated only in general terms and the Government to pay the contractor a fixed dollar amount.

AcqNotes Tutorials

 

Hidden Costs of Firm Fixed Price (FFP) Contracts?

With this type of contract, the contractor is responsible for controlling costs. However, a contractor can’t do this well without overseeing inputs, outputs, and processes. Regarding government contracts, these factors are usually controlled by outside government agencies. There may be delays, false starts, changes in goals, or long approval processes that make a cost-plus or labor-hour contract a better choice. When funding is cut, offices are reorganized, or project objectives change, it can greatly affect how well cost control is done for contracted services. The FFP contract doesn’t have the freedom to deal with these kinds of changes. Changing or ending a contract may make managing this type of contract harder.

Other Contract Types

– See Contract Finance Payments
– See Indefinite Delivery Contract
– See Incentive Contract
– See Cost-Reimbursement Contract
– See Time and Materials Contract

Notes:

• A Firm Fixed Price Contract price contract is not subject to any adjustment whereas a Fixed Price Contract might have a provision for economic price adjustments.

AcqLinks and References:

• Fixed Price Contract Overview FFP-Contract Template
• Best Business Practices Fixed Price Contracting
• DAU “Comparison of Major Contract Types” – Jan 2014
• Frank Kendall “Use of Fixed-Price Incentive Firm Contracts” – Mar 2012
• Website: FAR Subpart 16.2 – Fixed-Price Contracts
• Website: FAR Subpart 16.3 – cost-reimbursement Contracts
• Website: FAR Subpart 16.4 – Incentive Contracts
• Website: FAR Subpart 16.5 – Indefinite-Delivery Contracts
• Website: FAR Subpart 16.6 – Time-and-Materials, Labor-Hour, and Letter Contracts

Updated: 10/31/2023

Rank: G3.8