16.206-2 Application
Source: FAR 16.206-2 on acquisition.gov
Use fixed-ceiling-price contracts with retroactive price redetermination for small R&D projects only when a firm fixed price is unattainable and risk-sharing is clearly negotiated.
Overview
FAR 16.206-2 outlines when and how to apply fixed-ceiling-price contracts with retroactive price redetermination, specifically for research and development (R&D) contracts estimated at or below the simplified acquisition threshold. This contract type is used when a fair and reasonable firm fixed price cannot be negotiated at the outset, and the contract's value and short duration make other fixed-price types impractical. The regulation details requirements for negotiating a ceiling price, establishing a fair billing price, and ensuring contractors understand that their management effectiveness will influence the final price determination.
Key Rules
- Appropriate Use
- Only for R&D contracts at or below the simplified acquisition threshold where a firm fixed price is not feasible and other fixed-price types are impractical.
- Ceiling Price Negotiation
- A ceiling price must be negotiated to reflect a reasonable sharing of risk; it can only be adjusted under specific contract clauses.
- Billing Price Negotiation
- The contract should only be awarded after negotiating a billing price that is as fair and reasonable as possible.
- Contractor Incentives
- Contractors must be informed that their management effectiveness and ingenuity will be considered in the retroactive price redetermination.
Responsibilities
- Contracting Officers: Ensure proper contract type selection, negotiate ceiling and billing prices, and communicate performance expectations to contractors.
- Contractors: Understand risk-sharing, manage costs effectively, and demonstrate management effectiveness for favorable price redetermination.
- Agencies: Oversee compliance with contract negotiation and award procedures.
Practical Implications
- This section ensures appropriate risk allocation and price fairness in small R&D contracts where pricing is uncertain. Contractors must be proactive in cost management, as their performance will directly impact final compensation. Failure to negotiate fair prices or clarify expectations can lead to disputes or unfavorable price adjustments.
A fixed-ceiling-price contract with retroactive price redetermination is appropriate for research and development contracts estimated at the simplified acquisition threshold or less when it is established at the outset that a fair and reasonable firm fixed price cannot be negotiated and that the amount involved and short performance period make the use of any other fixed-price contract type impracticable.
(a) A ceiling price shall be negotiated for the contract at a level that reflects a reasonable sharing of risk by the contractor. The established ceiling price may be adjusted only if required by the operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.
(b) The contract should be awarded only after negotiation of a billing price that is as fair and reasonable as the circumstances permit.
(c) Since this contract type provides the contractor no cost control incentive except the ceiling price, the contracting officer should make clear to the contractor during discussion before award that the contractor’s management effectiveness and ingenuity will be considered in retroactively redetermining the price.