FAR 16.201—General.
Plain-English Summary
FAR 16.201 explains what counts as a fixed-price contract and how fixed-price pricing can be structured. It covers firm-fixed-price contracts, fixed-price contracts with an adjustable price, and the possible use of a ceiling price, target price, or target cost when the price is adjustable. It also explains when those prices may be changed, limiting changes to equitable adjustments or other revisions allowed by specific contract clauses or stated circumstances. A major practical point is that contracting officers must generally use firm-fixed-price or fixed-price with economic price adjustment contracts when buying commercial products and commercial services, unless an exception in FAR 12.207(b) applies. Finally, the section makes clear that time-and-materials and labor-hour contracts are not fixed-price contracts, which matters because those contract types carry different risk allocations, pricing rules, and administration requirements.
Key Rules
Fixed-price contracts set price terms
Fixed-price contracts provide either a firm price or, in appropriate cases, an adjustable price. This means the contractor and Government agree in advance on how payment will be determined, with the pricing risk allocated according to the contract type.
Adjustable price terms may include limits
When a fixed-price contract has an adjustable price, it may include a ceiling price, a target price, or both. These terms help define the pricing structure and establish boundaries or goals for later adjustment.
Price changes need contract authority
Unless the contract says otherwise, a ceiling price or target price can be changed only through equitable adjustment clauses or other clauses that expressly allow revision under stated circumstances. Informal changes or unilateral assumptions do not authorize price changes.
Commercial buys favor fixed-price
For commercial products and commercial services, the contracting officer must use firm-fixed-price or fixed-price with economic price adjustment contracts, except as allowed by FAR 12.207(b). This creates a strong preference for fixed-price structures in commercial acquisitions.
T&M and labor-hour are not fixed-price
Time-and-materials and labor-hour contracts are expressly excluded from the fixed-price category. They are separate contract types with different pricing mechanics and oversight requirements.
Responsibilities
Contracting Officer
Select the proper fixed-price contract type, use firm-fixed-price or fixed-price with economic price adjustment for commercial products and services unless an exception applies, and ensure any price adjustment authority is supported by the contract terms and applicable clauses.
Contractor
Understand the pricing structure and risk allocation in the contract, comply with the agreed pricing terms, and seek price changes only through the contract’s authorized adjustment mechanisms.
Agency
Support acquisition planning and contract type selection policies that align with FAR requirements, especially the preference for fixed-price structures in commercial acquisitions.
Practical Implications
This section is a contract-type gatekeeper: if the acquisition is commercial, the default expectation is firm-fixed-price or fixed-price with economic price adjustment, not a more flexible pricing arrangement.
A common pitfall is treating a target price or ceiling price as freely adjustable; in practice, changes require a specific contractual basis such as an equitable adjustment clause.
Contractors should not assume a target price guarantees payment at that level, and contracting officers should not assume a ceiling price can be moved without express authority.
Because time-and-materials and labor-hour contracts are not fixed-price, they should not be described or administered as if the Government has the same pricing certainty as under fixed-price contracts.
Careful contract drafting matters: the presence or absence of an economic price adjustment clause, equitable adjustment clause, or other revision clause determines whether and how price can change.
Official Regulatory Text
(a) Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances. The contracting officer shall use firm-fixed-price or fixed-price with economic price adjustment contracts when acquiring commercial products and commercial services, except as provided in 12.207 (b). (b) Time-and-materials contracts and labor-hour contracts are not fixed-price contracts.