FAR Subpart 16.2 Analysis: Fixed-Price Contracts

Overview

FAR Subpart 16.2 establishes the policies and procedures for fixed-price contracts, which are characterized by a set price that is either firm or adjustable under specific circumstances. These contracts shift the majority of performance risk to the contractor, incentivizing cost control and efficiency while minimizing the Government's administrative oversight.

Key Rules

• Risk Allocation: Firm-Fixed-Price (FFP) contracts place maximum risk and full responsibility for all costs and resulting profit or loss on the contractor.
• Commercial Acquisitions: Contracting Officers (COs) are mandated to use FFP or Fixed-Price with Economic Price Adjustment (FP-EPA) contracts when acquiring commercial products and services.
• Exclusions: Time-and-materials (T&M) and labor-hour contracts are explicitly excluded from the definition of fixed-price contracts.
• Price Adjustments: For adjustable fixed-price contracts, prices can only be modified through specific contract clauses (e.g., equitable adjustments) or stated contingencies, not based on the contractor's cost experience.
• Economic Price Adjustments (EPA): These are restricted to three types: adjustments based on established prices, actual costs of labor/material, or cost indexes. They are intended for use when market or labor conditions are unstable over long periods.
• Thresholds and Limitations:
  • Retroactive Price Redetermination: Limited to Research and Development (R&D) contracts at or below the Simplified Acquisition Threshold (SAT).
  • Level-of-Effort (LOE): Generally used for R&D/studies and limited to the SAT unless approved by the chief of the contracting office.

Responsibilities

• Contracting Officers:
  • Must establish that prices are "fair and reasonable" at the outset.
  • Must document the base level for EPA adjustments to ensure no duplication of contingency allowances.
  • Must verify that a contractor’s accounting system is adequate before using price redetermination contract types.
  • Responsible for describing labor/material types and rates in detail within the contract Schedule for EPA contracts.
• Contractors:
  • Assume performance and cost risks in FFP scenarios.
  • Must provide adequate data to establish base price levels in contracts not requiring certified cost or pricing data.
  • Must maintain accounting systems capable of supporting price redeterminations when applicable.
• Head of Contracting Activity (HCA):
  • Must provide written approval for the use of fixed-ceiling-price contracts with retroactive price redetermination.

Practical Implications

• Market Volatility: FP-EPA contracts serve as a vital tool in volatile economies. For example, in a multi-year construction or manufacturing contract, an EPA clause protects the contractor from hyper-inflation in raw materials (like steel or fuel) while protecting the Government from overpaying if market prices drop.
• Requirement Clarity: FFP contracts should only be used when requirements are well-defined. If the Government issues an FFP contract for a vague requirement, it often leads to frequent claims for equitable adjustment or "scope creep" disputes.
• Administrative Efficiency: FFP is the preferred method for the Government because it requires the least amount of "vouchering" and audit oversight compared to cost-reimbursement contracts.
• Buying Expertise vs. Results: The FFP Level-of-Effort (LOE) contract is a common real-world solution for "buying" a consultant's time for a study where the final answer cannot be guaranteed, but the amount of work (effort) can be capped and priced.