Overview

Contract types are grouped into two broad categories: fixed-price contracts and cost reimbursement contracts. A critical component of acquisition planning includes determining the contract type. This task is important for several reasons. After completion of market research and the definitization of program requirements, the acquisition team begins discussions on the appropriate contract type. The Government must consider which contract type will best serve the needs of the requirement and program objectives. Upon completion of the aforementioned tasks, the acquisition strategy is finalized. This allows the contracts and program offices to proceed with the final steps in the pre-award phase of the acquisition lifecycle. This edition of hashtag#FARFriday will focus on fixed-price contracts.

Definition

Fixed-price contracts provide for a firm fixed price or an adjustable price. When appropriate, a fixed-price contract may incorporate a clause that allows for an equitable market adjustment or revision of the contract price for specific, stated reasons. Fixed-price contracts are the Government’s preferred pricing arrangement when acquiring commercial products and commercial services. This places little risk on the Government and the contractor assumes “maximum risk and full responsibility for all costs and resulting profit or loss”. The onus is solely on the contractor to control costs and perform effectively.

Note: Time-and-materials contracts and labor-hour contracts are not fixed-price contracts.

Types of Fixed-Price Contracts

Firm Fixed Price (FFP)

Given the entirety of the risk is placed on the contractor in a firm-fixed-price scenario, the Government’s requirements must be clearly articulated. The acquisition of commercial products, commercial services, or other supplies or services on the basis of reasonably definite functional or detailed specifications are best suited to FFP. Firm-fixed-price contract types may also be used in conjunction with an award-fee incentive (see 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, such as schedule or performance.

Fixed-price contracts with economic price adjustment

Economic price adjustments are limited to industry-wide contingencies beyond the contractor’s control such as instability of market or labor conditions that will exist during an extended period of contract performance or contingencies included in the contract price that are identified and covered separately in the contract. Economic price adjustments provide for upward and downward revision of the stated contract price based on three general contingencies:

a.    Adjustments based on established prices such as increases or decreases from an agreed-upon level in established prices.

b.    Adjustments based on actual costs of labor or material such as increases or decreases in the costs of labor or material that the contractor actually experiences during contract performance.

c.    Adjustments based on cost indexes of labor or material that are specifically identified in the contract.

Fixed-price incentive contracts

Fixed-price incentive contracts  provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost. Stated more simply, they relate the amount of profit or fee payable under the contract to the contractor’s performance with the intent to motivate the contractor to deliver a better product or service and discourage inefficiency and waste.

Fixed-price contracts with prospective price redetermination

A fixed-price contract with prospective price redetermination may be used in scenarios of quantity production or services for which it can be negotiated for an initial period of time, but not for subsequent periods of contract performance. This pricing arrangement may allow for a ceiling price to be established considering certain assumptions that include the need for adjustment based on risk on the contractor’s behalf.

Firm-fixed-price, level-of-effort (FFP LOE) term contracts

In unique investigation or research and development arenas, FFP LOE contracts may be appropriate when the outcome of success is based on the effort expended rather than on the results achieved. The contract typically results in a report showing the results achieved through application of the required level of effort and payment is based on the effort expended versus results achieved.

FFP LOE may be used only when the circumstances would indicate that the work required cannot otherwise be clearly defined; the LOE is identified and agreed upon in advance; the intended work product cannot be achieved by expending less than the stipulated effort; and the contract price is at or below simplified acquisition threshold.

As with all adjustments to fixed-price contract types, the applicable conditions must be met and the contract must contain the appropriate contract clauses providing for equitable adjustment or other revision of the contract price under the stated circumstances.

So, are fixed-price contracts really fixed? It depends! However, there are a variety of types of fixed-price contracts that still enable the government the flexibility to adequately manage risk and for contractors to manage resources and profit.

Stay tuned to the next hashtag#FARFriday for a discussion on the Good and the Bad of Fixed-price contracts!