A Fixed-Price (FP) (FAR Subpart 16.2) contract provides for a price that might be subject to an adjustment based on the contractor’s cost experience in performing the contract. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.
Definition: Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both.
Fixed-Price (FP) Contract Regulations
The main regulations that govern FP contracts within the defense acquisition system.
Website: FAR Subpart 16.2 – Fixed-Price Contracts
Website: DFARS 216.2 – Fixed-Price Contracts
Benefits of using a Fixed-Price (FP) Contract
The main benefit of using a 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 except when adjusted due to contractual terms. 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 Fixed-Price (FP) 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, 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 FP 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 FP 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 FP 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.
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.
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Blog: Building Success Amidst Uncertainty: Navigating the Complexities of Firm-Fixed-Price Contracts in Construction
In the dynamic world of construction, contractors often find themselves grappling with various contract types, each carrying its unique set of risks and challenges. One such contract that has become increasingly prevalent is the firm-fixed-price contract. While this agreement offers stability and predictability, it is not without its share of potential pitfalls that can significantly impact contractors. In this blog post, we’ll explore the risks and challenges associated with firm-fixed-price contracts in the construction industry.
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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: 2/13/2024
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