16.205-2
Application
Fixed-price contracts with prospective price redetermination require a long initial fixed-price period, minimum 12-month subsequent periods, and clear risk-sharing through ceiling prices and adjustment clauses.
Overview
FAR 16.205-2 outlines when and how to apply fixed-price contracts with prospective price redetermination. This contract type is suitable for quantity production or service acquisitions where a fair and reasonable firm fixed price can be negotiated for an initial period, but not for later periods. The regulation specifies that the initial period should be as long as possible, with subsequent pricing periods lasting at least 12 months. Contracts may include a ceiling price to account for uncertainties, ensuring the contractor assumes a reasonable share of risk. Adjustments to the ceiling price are only allowed through specific contract clauses for equitable adjustment or other stated circumstances.
Key Rules
- Initial Pricing Period
- The initial firm fixed price period should be the longest feasible duration for which a fair and reasonable price can be set.
- Subsequent Pricing Periods
- Each subsequent period for price redetermination must be at least 12 months long.
- Ceiling Price
- Contracts may set a ceiling price based on performance uncertainties, with risk shared by the contractor. Adjustments are only allowed via contract clauses for equitable adjustment or other specified revisions.
Responsibilities
- Contracting Officers: Must determine the appropriate length of the initial period, ensure subsequent periods are at least 12 months, and establish ceiling prices reflecting risk and uncertainty.
- Contractors: Must accept the risk-sharing arrangement and comply with contract clauses regarding price adjustments.
- Agencies: Should oversee contract structuring and ensure compliance with FAR requirements for price redetermination.
Practical Implications
- This section ensures price stability for an initial period while allowing for future price adjustments as uncertainties resolve. Contractors and contracting officers must carefully negotiate initial terms and understand the limits on price adjustments. Common pitfalls include setting too short an initial period or failing to clearly define circumstances for price revision.