FFP (Firm-Fixed Price)

What is FFPFIRMFIXED (Price)?

A Firm-Fixed Price (FFP) contract is a type of government contract where the price is not subject to any adjustment based on the contractor's cost experience in performing the contract. It places the maximum risk and full responsibility for profit or loss upon the contractor and offers the government a high degree of certainty in terms of cost.

Definition

The Firm-Fixed Price (FFP) contract, as defined in FAR Part 16, is the most commonly used contract type in government contracting. It specifies a fixed price for a defined scope of work. The contractor agrees to deliver the product or service at that price, regardless of their actual costs. This arrangement incentivizes the contractor to manage costs effectively and efficiently to maximize profit.

FFP contracts are preferred by the government because they simplify administration and provide budget certainty. However, their suitability depends on the clarity of requirements and the availability of reasonably accurate cost estimates. Contractors must thoroughly assess risks and factor them into their pricing. If the requirements are vague or subject to change, the contractor may be exposed to undue financial risk.

Key Points

• Price Certainty: The agreed-upon price remains constant unless the scope of work changes.
• Risk Transfer: The majority of cost risk is transferred from the government to the contractor.
• Incentive for Efficiency: Contractors are motivated to control costs and improve efficiency to maximize profit.
• Administrative Simplicity: Compared to cost-reimbursement contracts, FFP contracts require less government oversight and audit.

Practical Examples

1. Software Development: A government agency contracts with a software company to develop a specific application for $500,000 using an FFP contract. The company is responsible for all development costs, regardless of how much time or resources are required.
2. Supply Chain: A contract to provide a certain quantity of specific equipment (e.g., computers, vehicles) with precisely defined specifications at a firm fixed price per unit. The contractor manages their supply chain, manufacturing, and transportation to deliver at the agreed price.
3. Construction Project: A government entity awards a contract for the construction of a building addition for $2 million using an FFP contract. The construction company is responsible for all labor, materials, and other related costs, and profit is determined by how well they can manage and control costs.