FIXED PRICE CONTRACTS

Fixed Price Fixed-Price

Firm-Fixed Economic Price Fixed-Price Fixed-Price Prospective Price
Price Adjustment Incentive Firm Award Fee Redetermination
Principal Risk None. Thus, the Unstable labor or Moderately uncertain Risk user will not Performance costs
to be contractor material market contract labor or be fully satisfied after first year due
Mitigated assumes all cost prices over the life material due to judgmental to lack of confidence
risk of the contract requirements acceptance criteria in estimate
.The Government
Use when… The requirement The market prices at A ceiling price can be Judgmental
is well-defined. risk are severable and established that standards can be needs a firm
•Contractors are significant. The risk covers the most fairly applied by fee commitment from
experienced in stems from industry- probable risks determining official. the contractor to
meeting it. wide contingencies inherent the work. Potential fee large deliver the supplies
•Market beyond the The proposed profit enough to: or services during
conditions are contractor's control. sharing formula •Provide a subsequent years.
stable. The $’s at risk out- would motivate the meaningful The dollars at risk
•Financial risks are weigh the contractor to control incentive; and outweigh the
otherwise administrative costs & meet other •Justify related administrative
insignificant burdens of an FPEPA. objectives admin burdens burdens of an FPRP
Elements A firm-fixed-price A fixed-price, ceiling •Ceiling price •Fixed-price. •Fixed-price for
for each line item on upward •Target cost & profit •Award amount the first period.
or one or more adjustment, and a •Delivery, quality, or •Award fee •Proposed
groupings of line formula to adjust other performance evaluation criteria subsequent
items price up or down targets (optional) and procedures periods (at least 12
based on established •Profit sharing for measuring months apart).
prices, actual labor formula performance •Timetable for
or material costs, •120 % ceiling and against the criteria pricing the next
labor or material 50/50 share are period(s)
indices points of departure
Contractor is Provide an Provide an Provide an Perform at the Provide acceptable
obliged to… acceptable acceptable acceptable time, place, and deliverables at the
deliverable at the deliverable at the deliverable at time the price fixed in time and place
time, place and time and place & place specified the contract specified in the
price specified in specified in the in contract at or contract at the
the contract contract at the below ceiling price price established
adjusted price for each period
Contractor Generally realizes Generally realizes Realizes profit by Generally realizes an For the period of
incentive an additional an additional completing work additional dollar of performance,
dollar of profit for dollar of profit for below ceiling price. profit for every realizes an additional
every dollar that every dollar that May earn higher dollar that costs are dollar of profit for
costs are reduced costs are reduced profit by incurring reduced; earns an every dollar that
costs below target additional fee for costs are reduced
cost or by meeting satisfying the
objective performance
performance targets standards
Typical Commercial Long-term contracts Production of a Performance-based Long-term
Application supplies & for commercial major system based contracts production of spare
services supplies during a on a prototype parts for a major
period of high system.
inflation
Variants Firm-Fixed-Price Successive Targets, Retroactive
Level-of-Effort with ceiling & floor Redetermination
on firm target profit

Adapted from DSMC Comparison of Major Contract Types chart dated April 2016
 COST TYPE CONTRACTS
Cost Plus
Incentive Cost Plus Cost Plus Cost or Time &
Fee Award Fee Fixed-Fee Cost-Sharing Materials
Principal Risk Highly uncertain and speculative labor hours, labor mix, and/or material requirements (and other things)
to be necessary to perform the contract. The Government assumes the risks inherent in the contract, benefiting if
Mitigated the actual cost is lower than the expected cost, or losing if the work cannot be completed within the
expected cost of performance.

Use when… An objective Objective incentive Relating fee to The contractor No other type of
relationship can be targets are not performance (e.g., to expects substantial contract is suitable
established feasible for critical actual costs) would compensating (e.g., because costs
between the fee aspects of be unworkable or of benefits for are too low to
and such measures performance. marginal utility absorbing part of justify an audit of
of performance as Judgmental the costs and/or the contractor's
actual costs, standards can be foregoing fee or the indirect expenses
delivery dates, fairly applied. vendor is a non-
performance Potential fee would profit entity
benchmarks, etc. provide meaningful
incentive.
.
Elements •Target cost •Estimated cost •Estimated cost •Total estimated •Ceiling price
•A minimum, •Base amount, if •Fixed fee cost •A per-hour labor
maximum, and applicable, and an •No fee rate that also
target fee award amount •If CS, an covers overhead
•A formula for •Award fee agreement on the and profit
adjusting fee based evaluation criteria Government's •Provisions for
on actual costs and procedures for share of the cost reimbursing direct
and/or measuring material costs
performance performance against
•Performance the criteria
targets (optional)

Contractor is Make a good faith effort to meet the Government's needs within the estimated cost Make a good faith
obliged to… in the Contract, Part I the Schedule, Section B Supplies or services and prices/costs effort to meet the
Government's
needs within the
ceiling price

Contractor Realizes a higher Realizes a higher Realizes a higher If cost sharing,

incentive fee by completing fee by meeting rate of return (i.e., shares in the cost of
the work at a judgmental fee divided by total providing a
lower cost and/or performance cost) as total cost deliverable of
by meeting other standards decreases mutual benefit
objective
performance
targets

Typical Research and Large scale research Research study Joint research with Emergency repairs to
Application development of study educational heating plants and
the prototype for institutions aircraft engines
a major system

Variants Completion or Labor Hour (LH)

Term

Adapted from DSMC Comparison of Major Contract Types chart dated April 2016