Overview
This section defines firm-fixed-price (FFP) contracts as agreements where the price is not adjusted based on the contractor's actual costs. It establishes FFP as the preferred contract type for commercial items and well-defined requirements, placing the highest level of financial risk on the contractor.
Key Rules
- Risk Allocation: The contractor assumes maximum risk and full responsibility for all costs, resulting in either a profit or a loss.
- Price Stability: The price remains fixed and is not subject to adjustment based on the contractor's cost experience during performance.
- Suitability: FFP contracts are required for commercial products and services and are appropriate for other supplies/services with definite functional or detailed specifications.
- Pricing Requirements: The Contracting Officer must be able to establish fair and reasonable prices at the outset, typically through adequate competition, historical price comparisons, or realistic cost estimates.
- Incentives: A contract remains FFP even if used with award-fee, performance, or delivery incentives, provided those incentives are based on factors other than cost.
- Administrative Burden: This contract type is designed to impose the minimum administrative burden on both the government and the contractor.
Practical Implications
- Profit Motivation: Because the government will not pay a penny more than the agreed price, contractors have a maximum incentive to control costs and improve operational efficiency to protect their margins.
- Requirement Clarity: Success with FFP contracts depends on the government's ability to provide clear, "reasonably definite" specifications; if the scope is vague, the contractor may face significant losses or the government may face frequent requests for equitable adjustments.