Firm fixed price contract

Firm fixed price contract
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Firm fixed price contract (FFP contract) - a contract in which the buyer pays the seller a fixed amount (in accordance with the terms of the contract), regardless of the seller's costs[1]. FFP contract is usually used in government and semi-government contracts where the scope of work is defined with all possible details. It is also used with minimal risk or when the risk can be predicted at an acceptable level. The contract price is the price bid, with no incentives or fees added. Government contracting officers are required to use firm-fixed-price or fixed-price with economic price adjustment contracts when acquiring commercial items or when awarding contracts resulting from sealed bidding procedures.

In this contract, the contractor[2]:

  • bears all risks associated with the performance of the contract
  • is fully responsible for all costs
  • is fully responsible for any resulting profit or loss
  • is interested in performing a contract below a firm fixed price, to increase profits

This motivates the contractor to control costs, effectively comply with the terms of the contract and minimize the administrative burden on the parties[3].

According to Federal Acquisition Regulation (FAR 16.202-2)[4]: A firm's fixed-price contract is suitable for the purchase of commercial goods or for the purchase of other supplies or services on the basis of reasonably defined functional or detailed specifications when the contract officer can establish fair and reasonable prices from the outset, for example when:

  • There is adequate price competition;
  • Reasonable prices are compared with previous purchases of the same or similar goods or services made competitively or supported by valid certified cost or price data;
  • Available information on costs or prices provides a realistic estimate of the likely costs of the activity; or
  • Uncertainties in performance may be identified and reasonable estimates of their cost impact made, and the contractor is willing to accept a firm fixed price that represents an assumption of the risks involved.

Other Fixed Price Contracts[edit]

Fixed Price with Economic Price Adjustment Contract - is a type of contract in which the buyer pays the reseller a fixed price that is already defined and provided for in the contract[5]. This contract allows you to define a price or contract rate adjustment in advance[6]. The nature of the contract is similar to a fixed-price contract, but fixed price with economic Price adjustment contract contains a special provision that allows for price adjustments.

Fixed Price Incentive Fee Contract - a contract in which the buyer pays the seller a fixed amount ( in accordance with the terms of the contract) and pays an additional amount when the seller meets the specified criteria[7].

Contract types[edit]

Fixed-Price Contracts[8]:

  • Firm Fixed Price
  • Fixed Price Incentive Fee
  • Fixed Price with Economic Price adjustment
  • Fixed-price contract with prospective price redetermination
  • Fixed-ceiling-price contract with retroactive price redetermination
  • Firm-fixed-price, level-of-effort term contract
  • Fixed-price incentive (firm target) contract
  • Fixed-price incentive (successive targets) contract

Cost-Reimbursable Contracts[9]:

  • Cost PLus Fixed Fee
  • Cost Plus Incentive Fee
  • Cost Plus Fee (CPF) oe Cost Plus Percentage of Cost
  • Cost Plus Award Fee

Time and Material Contracts[10]:

  • Cross between Cost-Reimbursable Contracts and Fixed-Price contracts

Footnotes[edit]

  1. A Guide to the Project Management Body of Knowledge, 5th edition, (2013), p. 363
  2. Thomas J. Kelleher Jr. ... (2010), p. 159-160
  3. Thomas J. Kelleher Jr. ..., (2010), p. 160
  4. Federal Acquisition Regulation, (2018), 16-202-2
  5. A Guide to the Project Management Body of Knowledge, 5th edition, (2013), p. 363
  6. A Guide to the Project Management Body of Knowledge, 5th edition, (2013), p. 363
  7. Thomas J. Kelleher Jr. ... (2010), p. 159-160
  8. Heldman K., Mangano V.,(2009), p. 149
  9. A Guide to the Project Management Body of Knowledge, 5th edition, (2013), p. 163-164
  10. A Guide to the Project Management Body of Knowledge, 5th edition, (2013), p. 164

References[edit]

Author: Anastasiia Ilnytska