Contract Compliance Associates

Fixed Price Contracts in General

There are six varieties of fixed-price contracts. They are:

Firm-Fixed-Price Contracts
Fixed-Price Contracts with Economic Price Adjustment
Fixed-Price Incentive Contracts
Fixed-Price Contracts with Prospective Price Redetermination
Fixed-Ceiling-Price Contracts with Retroactive Price Redetermination
Firm-Fixed-Price, Level-Of-Effort Term Contracts.

A fixed-price type of contract provides 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.

Firm-Fixed-Price Contract Description

A firm-fixed-price 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. 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.

Firm-Fixed-Price Contract Application

A firm-fixed-price 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:

(a) There is adequate price competition;

(b) 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;

(d) 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 assumption of the risks involved.

Economic Price Adjustment Description

A fixed-price contract with economic price adjustment provides for upward and downward revision of the stated contract price upon the occurrence of specified contingencies. Economic price adjustments are of three general types:

(a) Adjustments based on established prices. These price adjustments are based on increases or decreases from an agreed-upon level in published or otherwise established prices of specific items or the contract end items.

(b) Adjustments based on actual costs of labor or material. These price adjustments are based on increases or decreases in specified costs of labor or material that the contractor actually experiences during contract performance.

(c) Adjustments based on cost indexes of labor or material. These price adjustments are based on increases or decreases in labor or material cost standards or indexes that are specifically identified in the contract.

Economic Price Adjustment Application

A fixed-price contract with economic price adjustment may be used when:

(a) There is serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance, and

(b) Contingencies that would otherwise be included in the contract price can be identified and covered separately in the contract.

Incentive Contract Description

A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by a formula based on the relationship of final negotiated total cost to total target cost.

Incentive Contract Application

A fixed-price incentive contract is appropriate when:

(a) A firm-fixed-price contract is not suitable;

(b) The nature of the supplies or services being acquired and other circumstances of the acquisition are such that the contractor's assumption of a degree of cost responsibility will provide a positive profit incentive for effective cost control and performance; and

(c) If the contract also includes incentives on technical performance and/or delivery, the performance requirements provide a reasonable opportunity for the incentives to have a meaningful impact on the contractor's management of the work.

Prospective Price Redetermination Description

A fixed-price contract with prospective price redetermination provides for:

(a) A firm fixed price for an initial period of contract deliveries or performance; and

(b) Prospective redetermination, at a stated time or times during performance, of the price for subsequent periods of performance.

Prospective Price Redetermination Application

A fixed-price contract with prospective price redetermination may be used in acquisitions of quantity production or services for which it is possible to negotiate a fair and reasonable firm fixed price for an initial period, but not for subsequent periods of contract performance.

Fixed-Ceiling-Price Contracts Description

A fixed-ceiling-price contract with retroactive price redetermination provides for:

(a) A fixed ceiling price; and

(b) Retroactive price redetermination within the ceiling after completion of the contract.

Fixed-Ceiling-Price Contracts Application

A fixed-ceiling-price contract with retroactive price redetermination is appropriate for research and development contracts estimated at $100,000 or less when it is established at the outset that a fair and reasonable firm fixed price cannot be negotiated and that the amount involved and short performance period make the use of any other fixed-price contract type impracticable.

Level-of-Effort Contract Description

A firm-fixed-price, level-of-effort term contract requires:

(a) 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

(b) The Government to pay the contractor a fixed dollar amount.

Level-of-Effort Contract Application

A firm-fixed-price, level-of-effort term contract is suitable for investigation or study in a specific research and development area. The product of the contract is usually a report showing the results achieved through application of the required level of effort. However, payment is based on the effort expended rather than on the results achieved.