Key Takeaways

  • A fixed-price contract with economic price adjustments (FP-EPA) protects both buyers and sellers from long-term market volatility by allowing price changes tied to specific triggers like labor costs, material indexes, or inflation rates.
  • FP-EPA contracts are particularly valuable for multi-year government projects or contracts exposed to uncertain economic conditions, as they balance cost stability with flexibility.
  • Adjustments under FP-EPA must be clearly defined in the contract, including formulas, indices, and thresholds for both increases and decreases.
  • Government guidance (e.g., DoD memoranda) stresses the importance of documentation, negotiation, and justification for any price changes made under FP-EPA terms.
  • Understanding the difference between FP-EPA and firm fixed-price contracts helps businesses choose the right approach based on project risk, timeline, and cost predictability.

A fixed price with economic price adjustment contract allows for changes in price, either positive or negative, under certain circumstances. When a contract of this nature is in place, price adjustments can be made when there are market fluctuations that are beyond the seller's control.

Fixed Price Contracts

A fixed price (FP) contract includes a set price for a product or service. It can also include additional incentives when a company meets or exceeds specified objectives on certain projects. 

The simplest and most common form of fixed price contracts is purchase orders. When working with fixed price contracts, there is more risk for the seller. This is because if there are any price increases, the seller is responsible for covering those increased costs and cannot charge the buyer a higher rate than the one originally agreed to pay.

The three most common types of fixed price contracts include:  

  • Firm fixed price, or FFP  
  • Fixed price incentive fee, or FPIF  
  • Fixed Price with economic price adjustment, or FP-EPA.

How Economic Price Adjustments Work in Practice

While a standard fixed-price contract sets a static payment amount, fixed price economic price adjustments (FP-EPA) introduce flexibility without abandoning predictability. These clauses tie potential price changes to measurable, objective criteria — such as changes in labor rates, raw material costs, producer price indexes (PPIs), or inflation measures — ensuring that neither party absorbs disproportionate risk from market shifts.

For instance, a contract might include a clause stating that if the cost of a key input (like steel) rises or falls by more than 5% according to a specified government index, the contract price will be adjusted proportionally. This ensures the seller is protected from unexpected spikes while the buyer avoids overpaying when costs decline.

There are three common approaches to structuring FP-EPA adjustments:

  • Cost-based adjustments: Directly tied to actual changes in labor, material, or overhead costs.
  • Index-based adjustments: Linked to external economic indicators like the Consumer Price Index (CPI) or Producer Price Index (PPI).
  • Hybrid methods: Combine actual cost tracking with indexed benchmarks for more balanced risk-sharing.

Clear documentation and transparent calculation methods are critical. The contract must specify which costs are adjustable, the data source, the frequency of adjustments, and any maximum or minimum limits.

Firm Fixed Price (FFP)

Firm fixed price contracts are the most common type of fixed price contract. These are most favored by many organizations because the price cannot be changed unless the scope of the expected work is changed. If there are any cost increases for the project that are because of the actions of the seller's performance, the seller is responsible for covering those additional costs.

Fixed Price Incentive Fee (FPIF)

Fixed price incentive fee contracts allow for a bit more flexibility for both the buyer and the seller. With this type of contract, sellers have the ability to receive additional compensation for higher performance when certain metrics are met. This should be outlined and agreed upon ahead of time. 

In most cases, these incentives will be related to metrics such as:  

  • Cost  
  • Schedule  
  • Technical performance.

However, there is still a cap, or price ceiling, with an FPIF contract. Any accrued costs that exceed this cap are the seller's responsibility. There are a number of different variations on the FPIF contract. The seller and the project manager should agree to these terms before work commences.

Fixed-Price Contract With Economic Price Adjustment

A fixed price contract with economic price adjustment allows for changes in the price, either positive or negative, under certain circumstances. When a contract of this nature is in place, price adjustments can be made when there are market fluctuations that are beyond the seller's control.

Price increases cannot exceed the price ceiling, which must be reasonable and agreed to by both parties before work begins. There should also be provisions set in place for price reductions when rates fall below certain thresholds that have been set forth in the contract.

There are generally two types of price adjustments that can be made under an FP-EPA contract:  

  • Adjustments that are made based on an actual increase or decrease in costs associated with specific labor or materials.
  • Adjustments that are made based on standard costs or indices that are specifically laid out in the service contract.

When Should FP-EPA Contracts Be Used?

FP-EPA contracts are usually only appropriate when there is reasonable doubt regarding the stability of certain conditions over the extended period of a project, such as:  

  • Market stability  
  • Labor conditions.   

Additionally, contracts of this nature should only be used when the contingencies that would normally be included in a firm fixed price contract can't be easily identified and covered separately in that contract. Because FP-EPA contracts can be difficult to administer, they are not a typical choice under normal circumstances.

Best Practices for Structuring FP-EPA Clauses

When drafting FP-EPA provisions, careful planning is essential to prevent disputes and ensure adjustments are applied fairly. Consider the following best practices:

  1. Define Objective Triggers: Clearly identify the events (e.g., raw material price increases, wage escalations) that justify a price change.
  2. Use Reliable Data Sources: Reference publicly available, verifiable indices from sources like the U.S. Bureau of Labor Statistics or Department of Labor.
  3. Set Adjustment Limits: Include ceilings and floors on how much the price can change to manage budgetary exposure.
  4. Include Documentation Requirements: Require contractors to provide supporting evidence for cost changes before adjustments are approved.
  5. Specify Timing: State how often adjustments will be reviewed (annually, quarterly, etc.) and when they become effective.

FP-EPA clauses are especially effective for long-term defense or infrastructure contracts where commodity prices, supply chain conditions, or labor costs are likely to fluctuate over time. The Department of Defense (DoD) has issued guidance emphasizing the importance of well-documented cost data and negotiation transparency when seeking adjustments.

Difference Between an FP-EPA Contract and an FP Contract

At the core, FP-EPA contracts are quite similar to regular FP contracts. The main difference is that FP-EPA contracts allow for special provisions for price adjustments to be made under certain circumstances. 

Both the buyer and the seller will need to agree to these requirements at the beginning of the contract agreement. This is so there is no confusion about when price adjustments are allowed. It's a necessity to address the uncertainty that is common in certain markets.

The economic conditions of the market will change over time. FP-EPA contracts are most common when a project is expected to last for a long period of time, usually several years. Therefore, there need to be contingencies in place to adjust for the changing market during the course of the contract. 

Legal and Strategic Considerations in FP-EPA Agreements

Beyond the structural differences, FP-EPA contracts introduce legal and strategic complexities that require careful management:

  • Negotiation Dynamics: Because FP-EPA terms allocate risk differently, they often require more extensive negotiation than fixed-price contracts. Buyers must assess budget flexibility, while sellers must justify potential adjustments with credible cost data.
  • Audit and Compliance Risks: Government contracts may be subject to audits under statutes like the Truth in Negotiations Act (TINA), requiring contractors to disclose accurate and current cost data supporting any adjustment claims.
  • Inflation Response Strategies: Agencies and contractors may use FP-EPA terms proactively to mitigate inflation risk rather than reacting to it mid-contract. This proactive approach can prevent disputes and maintain stable project delivery.
  • Market Competitiveness: FP-EPA contracts can make contractors more competitive in bidding for long-term government projects by demonstrating a willingness to share cost risks fairly over time.

Ultimately, FP-EPA contracts offer a sophisticated balance of stability and flexibility — ideal for environments where price predictability is needed but economic uncertainty cannot be ignored.

Frequently Asked Questions

  1. What is a fixed price with economic price adjustment contract?
    It’s a contract that allows price changes based on objective criteria like inflation, labor rates, or material costs, protecting both buyer and seller from unforeseen market shifts.
  2. When are FP-EPA contracts most useful?
    They’re best for long-term projects with uncertain economic conditions, such as defense contracts, construction projects, or multi-year supply agreements.
  3. How are price adjustments calculated under FP-EPA?
    Adjustments are typically tied to cost indices, actual expenses, or hybrid formulas defined in the contract. These are reviewed periodically to ensure fairness.
  4. Are FP-EPA contracts subject to audits?
    Yes. Government contracts with FP-EPA clauses often fall under TINA or similar regulations, requiring accurate, documented cost data for any price changes.
  5. Can prices decrease under FP-EPA contracts?
    Yes. FP-EPA clauses usually allow for both upward and downward adjustments, ensuring the contract remains equitable even when market prices fall.

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