FAR 16.205-2—Application.
Plain-English Summary
FAR 16.205-2 explains when a fixed-price contract with prospective price redetermination is appropriate and how it should be structured. It covers the basic use case for this contract type in quantity production or services, the requirement that the government be able to negotiate a fair and reasonable firm fixed price for an initial period, the fact that later periods cannot be priced firmly at the outset, the rule that the initial period should be the longest period reasonably supportable, the requirement that each later pricing period be at least 12 months, and the option to include a ceiling price. It also addresses how that ceiling price should be set based on performance uncertainties, how risk should be shared between the contractor and the government, and how the ceiling may later be changed only through contract clauses that expressly allow equitable adjustment or other stated price revisions. In practice, this section is about using a hybrid fixed-price structure when the government can lock in an initial price but cannot confidently predict future costs, while still preserving discipline, risk allocation, and clear limits on later price changes.
Key Rules
Use only when later pricing is uncertain
This contract type is appropriate for quantity production or services when a fair and reasonable firm fixed price can be negotiated for an initial period, but not for later periods. It is meant for situations where future costs are too uncertain to set firm prices for the full performance period.
Initial period should be longest feasible
The initial pricing period should be the longest period for which a fair and reasonable firm fixed price can be negotiated. The government should not shorten the firm-price period unnecessarily if a longer one can be supported.
Later periods must be at least 12 months
Each subsequent pricing period must be at least 12 months. This prevents frequent repricing and gives the contract a stable structure for later redeterminations.
Ceiling price is optional
The contract may include a ceiling price, but it is not required. If used, it should be based on an evaluation of the uncertainties in performance and their likely cost effects.
Risk must remain shared
The ceiling price should leave the contractor with a reasonable share of the risk. The clause is not intended to eliminate contractor exposure to cost growth or to guarantee full recovery of all costs.
Ceiling changes only by authorized clauses
Once established, the ceiling price may be changed only through contract clauses that allow equitable adjustment or other stated revisions of the contract price. It cannot be adjusted informally or outside the contract’s express terms.
Responsibilities
Contracting Officer
Determine whether the acquisition fits this contract type, negotiate the longest supportable initial firm-fixed-price period, ensure each later pricing period is at least 12 months, and decide whether a ceiling price is appropriate based on performance uncertainties and risk allocation. The contracting officer must also ensure any later price changes occur only under applicable contract clauses.
Contractor
Accept the risk structure of the contract, perform during the initial firm-price period at the agreed price, and prepare for prospective redetermination in later periods. The contractor must understand that the ceiling price limits government payment exposure but does not remove contractor risk, and that price changes require contractual authority.
Agency
Use this contract type only when it fits the acquisition need and supports sound pricing policy. The agency should ensure the contract structure reflects realistic cost uncertainty, appropriate risk sharing, and compliance with the minimum period and ceiling-price requirements.
Practical Implications
This section is most useful when the government can price the near term confidently but not the full term, such as production runs or services with uncertain future labor, material, or market conditions.
A common mistake is using too short an initial firm-price period when a longer one could reasonably be negotiated; FAR expects the firm-price period to be as long as practicable.
Another pitfall is setting a ceiling price without a real analysis of uncertainty and risk, which can lead to unrealistic pricing or disputes later.
Contracting officers should be careful not to treat the ceiling as a routine cap that can be changed informally; any revision must come from an applicable contract clause.
Contractors should watch the redetermination schedule closely, because later pricing periods are not automatically fixed and may require negotiation or adjustment under the contract’s stated terms.
Official Regulatory Text
A fixed-price contract with prospective price redetermination may be used in acquisitions of quantity production or services for which it is possible to negotiate a fair and reasonable firm fixed price for an initial period, but not for subsequent periods of contract performance. (a) The initial period should be the longest period for which it is possible to negotiate a fair and reasonable firm fixed price. Each subsequent pricing period should be at least 12 months. (b) The contract may provide for a ceiling price based on evaluation of the uncertainties involved in performance and their possible cost impact. This ceiling price should provide for assumption of a reasonable proportion of the risk by the contractor and, once established, may be adjusted only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.