FCAFIXEDPRICE (With Cost Adjustment)

What is FCAFIXEDPRICE (With Cost Adjustment)?

FCAFIXEDPRICE, or Fixed-Price Contract with Cost Adjustment, is a type of contract used in government procurement where the price is fixed at the outset, but provisions are included to allow for adjustments based on specific, pre-defined economic conditions or other factors. This type of contract aims to balance the benefits of a fixed-price agreement with the need to accommodate potential cost fluctuations that are beyond the contractor's control.

Definition

An FCAFIXEDPRICE contract is a variation of a fixed-price contract (as defined in FAR Part 16) that includes clauses allowing for upward or downward adjustments to the stated fixed price under specific, well-defined circumstances. These circumstances are typically linked to objective economic indicators, such as published indices of inflation, or fluctuations in the market prices of key raw materials critical to performance. The adjustment mechanisms must be clearly stated in the contract, including the specific index or measurement to be used, the base level from which changes will be measured, and the formula for calculating the adjustment amount. This is crucial to maintain transparency and avoid disputes. FCAFIXEDPRICE contracts are beneficial when the government seeks the cost certainty of a fixed price but acknowledges the potential for unpredictable cost drivers that necessitate some level of flexibility.

The FAR provides guidance on using economic price adjustment (EPA) clauses within fixed-price contracts (see FAR Subpart 16.2). While not all FCAFIXEDPRICE contracts rely solely on economic indices, the principles of EPA are foundational. Contractors should carefully review the adjustment clauses to understand the triggers for price adjustments, the calculation methodology, and the timing of adjustments. Thorough understanding of these factors is key to effective contract management and accurate financial planning.

Key Points

• Defined Adjustment Mechanisms: The contract must clearly specify the factors that trigger price adjustments and the precise formula or mechanism used to calculate the adjustment amount.
• Objective Indicators: Adjustment factors typically rely on objective and verifiable data sources, such as published economic indices or market prices. Subjective factors are generally avoided.
• Risk Allocation: FCAFIXEDPRICE contracts allow the government and contractor to share the risk associated with economic uncertainty. The contractor retains responsibility for managing costs within the fixed price, except for the agreed-upon adjustment factors.
• Price Ceiling: While the price may be adjusted upward, some FCAFIXEDPRICE contracts include a price ceiling, limiting the total potential adjustment.

Practical Examples

1. Fuel Price Adjustments in Transportation Contracts: A contract for transporting goods might include a provision allowing for adjustments to the fixed price based on fluctuations in the price of diesel fuel, as measured by a specific industry index.
2. Commodity Price Adjustments in Construction Contracts: A construction contract could include a provision adjusting the price based on changes in the cost of steel or concrete, using a recognized market index for those materials.
3. Labor Rate Adjustments in Service Contracts: A service contract for long-term maintenance might include a clause that allows for adjustments to the fixed price based on changes to prevailing wage rates, as determined by the Department of Labor.