16.205
Fixed-price contracts with prospective price redetermination
Fixed-price contracts with prospective price redetermination allow for an initial firm price and later price adjustments when future costs are uncertain, but their use is limited and must follow specific FAR requirements.
Overview
FAR 16.205 covers fixed-price contracts with prospective price redetermination, a contract type used when it is possible to negotiate a firm fixed price for an initial period but not for subsequent periods due to uncertainties in cost projections. These contracts establish a fixed price for an initial period (usually the first year) and provide for price redetermination at stated times during performance. This approach is intended for situations where costs are expected to change but cannot be accurately predicted at the outset. The regulation outlines when this contract type is appropriate, its limitations, and the required contract clause.
Key Rules
- Description (16.205-1)
- Defines the contract type: fixed price for an initial period, with prospective price redetermination for later periods.
- Application (16.205-2)
- Specifies when this contract type should be used, typically when cost uncertainties exist beyond the initial period.
- Limitations (16.205-3)
- Restricts use to situations where it is not feasible to negotiate a firm fixed price for the entire contract period and prohibits use for research and development contracts exceeding the simplified acquisition threshold.
- Contract Clause (16.205-4)
- Requires inclusion of a specific clause outlining the price redetermination process and timing.
Responsibilities
- Contracting Officers: Must determine appropriateness, ensure compliance with limitations, and include the required clause.
- Contractors: Must provide necessary cost/pricing data for redetermination and comply with contract terms.
- Agencies: Oversee proper use and ensure contracts are not misapplied.
Practical Implications
- This contract type balances risk between the government and contractor when future costs are uncertain.
- It is not suitable for all procurements and has specific limitations, especially regarding R&D contracts.
- Failure to follow the prescribed process or include the required clause can result in noncompliance or disputes.