Firm Fixed Price Contract: Everything You Need to Know
A firm fixed price contract lays out a set fee to be paid to a contractor for completing a specific job. 3 min read
2. Benefits of Firm Fixed Contracts
3. Contractors Generally Assume the Risk of Higher Costs
A firm fixed price contract lays out a set fee to be paid to a contractor for completing a specific job. This fixed price cannot be changed under any circumstances, which can pose a potential risk to the contractor if a project is not managed well.
Fixed Price (FFP) Contract
According to FAR Subpart 16.2, a firm fixed price contract includes a set fee that cannot be changed. This is even if the contractor incurs costs that exceed the target cost outlined in the contract. This is the riskiest type of contract from the contractor's point of view because it requires the contractor to assume all responsibility for the financial aspects of a project, including:
- Project costs
- Potential profits
- Potential losses.
However, a firm fixed price contract usually provides contractors with a high level of incentive to:
- Properly control the cost of a job.
- Make sure the job is carried out effectively.
Contracts of this nature pose minimal risk to the client because the contractor is highly motivated to keep costs low and the performance high.
Contracting officers also have the option to use firm fixed price contracts in combination with the following when the incentive fee is calculated using factors other than the cost of a project:
- Award Fee Incentive, as outlined in FAR Subpart 16.404
- Delivery incentives.
While these supplementary agreements allow for additional incentives to be paid under certain circumstances, the contract will still be a firm fixed price contract.
Benefits of Firm Fixed Contracts
Firm fixed price contracts are generally useful when attempting to obtain commercial items, supplies, or services based on their reasonably detailed specifications. This occurs when the parties involved can agree on reasonable fees at the beginning.
Examples of situations in which a firm fixed price contract may be appropriate, according to FAR Subpart 16.202-2, include:
- When there is significant pricing competition.
- When there have been similar purchases made to compare pricing to.
- When available information makes it possible to estimate possible costs realistically.
- When uncertainties can be properly identified and addressed.
- When the contractor is willing to accept the risks.
Contractors Generally Assume the Risk of Higher Costs
In most cases, a contractor does not have a full understanding of the implications a firm fixed price contract can have. Agility Defense and Government Services, formerly known as Taos Industries learned about some of these implications in a rather difficult way.
In this case, the US government hired the contractor (Agility) under a firm fixed price indefinite quantity contract to deliver weapons to support missions the United States Army was carrying out in Afghanistan. This contract was awarded in December of 2007 for the price of $1.3 million. The contract set forth a required delivery deadline by April 7, 2008.
Agility attempted to obtain the required weapons from companies located in Hungary and Bulgaria. However, both countries' governments refused to allow the weapons to be released. Two years later, in April 2010, Agility had still failed to deliver the weapons as they were contractually obligated to do.
At this time, the government and Agility signed an agreement that acknowledged the contractor would not be able to meet the required delivery date in the original contract. In addition, the contractor would provide a second delivery of different weapons as a consideration for its late delivery. The delivery date for the originally requested weapons was marked as "to be determined" at this time.
The following year, Agility had still not delivered any of the weapons they were contractually obligated to provide. In March 2001, both parties signed a second modification agreement that outlined a firm delivery date for the weapons, dependent on the United States Army. However, there was never any change made to the originally agreed upon price set forth in the contract.
Agility was finally able to deliver on the original request in December 2011 and requested an adjustment of $1.4 million to their service fee because of the fact that they had experienced a large number of additional costs. This was due to the actions of outside parties that were beyond the contractor's control. When their original request was denied, Agility filed a second, certified claim for adjustment. This second request was also denied, which lead to a long, hard legal battle for Agility.
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