16.202-1 Description
Source: FAR 16.202-1 on acquisition.gov
Firm-fixed-price contracts lock in a set price, placing all cost risk on the contractor and incentivizing efficient performance.
Overview
FAR 16.202-1 describes the firm-fixed-price (FFP) contract type, emphasizing that the contract price is not subject to adjustment based on the contractor’s actual costs. This places the maximum risk and responsibility for costs and profit or loss on the contractor, incentivizing cost control and effective performance. The FFP contract type is designed to minimize administrative burden for both parties. The regulation also allows for the use of award-fee or performance/delivery incentives with FFP contracts, provided these incentives are based solely on non-cost factors, and the contract remains classified as firm-fixed-price.
Key Rules
- Firm-Fixed-Price Contract Definition
- The contract price is set and not adjustable based on the contractor’s cost experience.
- Risk and Responsibility
- The contractor assumes full risk and responsibility for all costs and resulting profit or loss.
- Incentives
- Award-fee and performance/delivery incentives may be included if they are based only on non-cost factors, without changing the contract’s FFP nature.
Responsibilities
- Contracting Officers: Ensure the contract price is firm and not subject to cost adjustment; may include non-cost-based incentives.
- Contractors: Must manage costs and performance within the fixed price; bear all risk for overruns or savings.
- Agencies: Oversee contract compliance and ensure incentives, if used, are based on non-cost factors.
Practical Implications
- FFP contracts are commonly used when requirements are well-defined and cost risk can be reasonably estimated.
- Contractors must carefully estimate costs, as they cannot recover overruns.
- Misunderstanding the risk allocation or incentive structure can lead to financial loss or disputes.
A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties. The contracting officer may use a firm-fixed-price contract 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. The contract type remains firm-fixed-price when used with these incentives.