Firm fixed price contract

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. 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:

• 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.

According to Federal Acquisition Regulation (FAR 16.202-2): 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

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. This contract allows you to define a price or contract rate adjustment in advance. 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.

Contract types

Fixed-Price Contracts:

• 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:

• 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:

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

Examples of Firm fixed price contract

• Construction Contracts - Many construction projects are completed under FFP contracts. This type of contract allows the owner to pay a fixed price for an entire construction project, regardless of the actual costs incurred by the contractor during the course of the project.
• Government Contracts - Many government contracts are awarded under an FFP contract. This type of contract allows the government to pay a fixed price for goods and services, regardless of the actual costs incurred by the contractor during the course of the project.
• Professional Services - Professional services such as legal and consulting services are often contracted under an FFP contract. This type of contract allows the client to pay a fixed fee for the service, regardless of the actual costs incurred by the service provider during the course of the project.
• Software Development - Software development projects are often contracted under an FFP contract. This type of contract allows the customer to pay a fixed fee for the software, regardless of the actual costs incurred by the software company during the course of the project.

Advantages of Firm fixed price contract

Firm fixed price contracts have many advantages, including:

• Cost certainty - FFP contracts provide buyers with cost certainty as the contract specifies the exact amount that the buyer must pay for the seller's services. This reduces the risk of cost overruns and allows the buyer to better plan their budget.
• Reduced negotiation time - FFP contracts have less room for negotiation than other types of contracts, so they can be set up quickly. This means that buyers and sellers can start their projects faster.
• More control for the buyer - By paying a fixed price, the buyer can be sure that they are getting the quality of service they expect. They also have more control over the project's timeline and budget, since they are not at the mercy of the seller's cost overruns.
• Increased competition - FFP contracts can attract more bidders to a project, since they provide the seller with a guaranteed amount of payment. This can lead to more competitive bids and better prices for the buyer.

Limitations of Firm fixed price contract

Firm fixed price contracts (FFP contracts) have several limitations that should be taken into consideration when deciding whether or not this type of contract is suitable for a particular project. These limitations include:

• Price uncertainty: FFP contracts can leave the seller with the uncertainty of whether the agreed price will cover the cost of the project. As a result, the seller may be left with an unexpected financial burden.
• Limited services: FFP contracts may limit the services that the seller is able to provide, as the price is fixed. This can leave the buyer with fewer services than they had originally anticipated.
• Lack of flexibility: FFP contracts are rigid and often don't allow for any changes to be made to the project. This can lead to the buyer not being able to modify the project to fit their needs.
• Unforeseen costs: FFP contracts do not allow for any unforeseen costs that may arise during the project. This can leave the seller with the responsibility of covering these costs and can lead to financial losses.
• Delays: FFP contracts can lead to delays in the completion of the project due to the limited flexibility of the agreement. This can lead to added costs and disruption to the schedule.

Other approaches related to Firm fixed price contract

Apart from firm fixed price contracts, there are other approaches that can be used for a contract between a buyer and a seller.

• Cost-plus contract - a contract in which the buyer pays the seller an agreed-upon fee and then pays the seller an additional amount that is based on the seller’s actual costs.
• Time and materials contract - a contract in which the buyer pays the seller an agreed-upon fee based on the seller’s estimated costs and the amount of time it takes to complete the work.
• Unit price contract - a contract in which the buyer pays the seller an agreed-upon fee based on a per-unit price for each item purchased.
• Lump sum contract - a contract in which the buyer pays the seller a lump sum for the entire project.

In summary, there are a variety of approaches that can be used for a contract between a buyer and a seller, including firm fixed price contracts, cost-plus contracts, time and materials contracts, unit price contracts, and lump sum contracts.

Footnotes

Firm fixed price contract — recommended articles

Lump-sum contract — Cost reimbursement — Prime contractor — Provisional sum — Task order — Unit price contract — Forms of contract — Construction management contract — Commencement date

References

• A Guide to the Project Management Body of Knowledge, 5th edition, (2013),A Guide to the Project Management Body of Knowledge, 5th edition, Published by Project Management Institute, Inc.
• Federal Acquisition Regulation (2018), 16-202 Firm Fixed Price Contracts
• Heldman K., Mangano V., (2009), Project Management Professional Exam Review Guide, Published by John Wiley & Sons
• Thomas J. Kelleher Jr., Thomas E. Abernathy, IV, Hubert J. Bell, Jr., Steven L Reed, Smith, Currie & Hancock LLP, (2010), Currie & Hancock's Federal Government Construction Contracts: A Practical Guide for the Industry Professional, Published by John Wiley & Sons

Author: Anastasiia Ilnytska