FAR 16.202—Firm-fixed-price contracts.

Description.

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.

Application.

FAR 16.202-2 explains when a firm-fixed-price (FFP) contract is appropriate and what conditions must exist before a contracting officer should use it. The section covers the types of acquisitions suited to FFP contracts, including commercial products and commercial services, as well as other supplies or services described by reasonably definite functional or detailed specifications. It also explains the core pricing requirement: the contracting officer must be able to establish a fair and reasonable price at the outset. To do that, the rule identifies four common bases for price reasonableness: adequate price competition, comparison to prior competitive purchases or purchases supported by valid certified cost or pricing data, realistic cost estimates based on available cost or pricing information, and situations where performance uncertainties can be identified and priced into the offer. In practice, this section is the FAR’s guide for deciding when the government can shift cost risk to the contractor and lock in a fixed price without needing a cost-reimbursement structure. It matters because choosing FFP in the wrong situation can lead to poor pricing, excessive risk, weak competition, or contract performance problems, while choosing it correctly supports efficiency, predictability, and strong contractor incentives to control costs.