FAR 16.202-1—Description.
Plain-English Summary
FAR 16.202-1 explains what a firm-fixed-price (FFP) contract is and why the Government uses it. It covers the core pricing rule that the contract price is not adjusted based on the contractor’s actual cost experience, the allocation of risk and profit/loss to the contractor, the strong cost-control incentive built into this contract type, and the relatively low administrative burden it creates for both sides. It also addresses how FFP contracts can be combined with award-fee incentives and performance or delivery incentives, as long as those incentives are based solely on factors other than cost. In practice, this section tells contracting officers when an FFP arrangement is truly fixed in price, what that means for contractor accountability, and how to preserve the FFP nature of the contract even when incentive features are added. For contractors, it signals that they bear the financial consequences of performance efficiency and cost overruns, while also understanding that non-cost incentives may still be available.
Key Rules
Price Is Not Adjustable
A firm-fixed-price contract does not change based on the contractor’s actual costs during performance. If the contractor spends more or less than expected, the contract price stays the same unless the contract is otherwise modified under a separate contractual authority.
Contractor Bears Cost Risk
The contractor assumes maximum risk for performance costs and is fully responsible for any profit or loss. This means the contractor must manage estimating, purchasing, labor, and execution carefully because overruns generally cannot be passed to the Government.
Strong Cost-Control Incentive
Because the contractor keeps any savings and absorbs any overruns, the FFP structure gives a strong incentive to control costs and perform efficiently. The Government benefits when the contractor manages work well, since the price does not rise with higher actual costs.
Low Administrative Burden
FFP contracts generally require less day-to-day cost monitoring than cost-reimbursement contracts because the Government does not need to track and evaluate actual allowable costs to determine payment. Administration focuses more on whether the contractor delivers the required supplies or services at the agreed price and quality.
Award Fee May Be Added
The contracting officer may combine an FFP contract with an award-fee incentive under FAR 16.404. Doing so does not change the contract’s fixed-price nature, provided the award fee is based solely on factors other than cost.
Performance or Delivery Incentives Allowed
The contracting officer may also use performance or delivery incentives under FAR 16.402-2 and 16.402-3 with an FFP contract. These incentives must be tied only to non-cost factors, such as technical performance, schedule, or delivery outcomes, so the contract remains firm-fixed-price.
Responsibilities
Contracting Officer
Select and structure the firm-fixed-price contract when appropriate, recognizing that the price will not adjust for the contractor’s cost experience. If using award-fee or performance/delivery incentives, ensure they are based solely on non-cost factors so the contract remains firm-fixed-price.
Contractor
Perform the work within the fixed price and manage all costs, labor, and resources to avoid losses. The contractor must also understand that any added incentives do not reduce its underlying responsibility for cost control and efficient performance.
Agency
Use the FFP structure when it fits the acquisition’s risk profile and performance objectives, and support contracting officers in defining requirements and incentive structures that do not undermine the fixed-price nature of the contract.
Practical Implications
For contractors, the biggest day-to-day issue is cost discipline: poor estimating, supply chain problems, or inefficiency can directly reduce profit or create a loss.
For contracting officers, the key pitfall is mixing cost-based adjustments into an FFP arrangement in a way that blurs the contract type or creates unintended reimbursement features.
Award fees and performance incentives can be useful, but they must be designed carefully so they reward results other than cost and do not convert the contract into something other than firm-fixed-price.
Because administration is lighter than under cost-reimbursement contracts, the Government should focus on clear requirements, measurable acceptance criteria, and timely inspection or evaluation of deliverables.
A common mistake is assuming that “fixed price” means no changes are ever possible; changes may still occur through proper contract modification authority, but not because the contractor’s actual costs were higher or lower than expected.
Official Regulatory Text
A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties. The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404 ) and performance or delivery incentives (see 16.402-2 and 16.402-3 ) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.