16.205-3
Limitations
Fixed-price contracts with prospective price redetermination can only be used when other fixed-price options are unsuitable and the contractor’s accounting system supports timely price adjustments.
Overview
FAR 16.205-3 outlines the limitations on the use of fixed-price contracts with prospective price redetermination. This section specifies the conditions that must be met before this contract type can be used, ensuring it is only applied when more appropriate contract types (such as firm-fixed-price or fixed-price incentive contracts) are not suitable. It also requires that the contractor's accounting system is adequate and compatible with the contract's pricing periods, and that price redetermination actions can be conducted promptly as scheduled.
Key Rules
- Appropriateness of Contract Type
- This contract type cannot be used unless a firm-fixed-price contract is not suitable and a fixed-price incentive contract would not be more appropriate.
- Adequate Accounting System
- The contractor must have an accounting system capable of supporting price redetermination.
- Alignment of Pricing Periods
- Pricing periods must be structured to align with the contractor’s accounting system.
- Timely Price Redetermination
- There must be reasonable assurance that price redetermination will occur promptly at the specified times.
Responsibilities
- Contracting Officers: Must ensure all limitations are met before selecting this contract type and verify the contractor’s accounting system and pricing period alignment.
- Contractors: Must maintain an adequate accounting system and be prepared for timely price redetermination.
- Agencies: Should oversee compliance with these prerequisites and ensure contract administration supports timely redetermination.
Practical Implications
- This section exists to prevent misuse of prospective price redetermination contracts and to ensure pricing fairness and administrative feasibility.
- It impacts contract selection decisions and requires careful evaluation of contractor systems and contract structure.
- Common pitfalls include inadequate accounting systems or misaligned pricing periods, leading to compliance issues or delays in price redetermination.