FAR 16.205-3—Limitations.
Plain-English Summary
FAR 16.205-3 sets the limitations on using a fixed-price contract with prospective price redetermination. This section addresses when that contract type may be selected, including the required negotiation findings that a firm-fixed-price contract is not appropriate and that a fixed-price incentive contract would not be more suitable. It also covers administrative and accounting prerequisites: the contractor’s accounting system must be adequate for price redetermination, the pricing periods must align with the contractor’s accounting system, and there must be reasonable assurance that redetermination actions will occur promptly at the scheduled times. In practice, this rule is meant to keep agencies from using a complex contract type unless the pricing structure can actually be administered effectively and on time. It protects both the Government and the contractor by ensuring that price adjustments are based on reliable accounting data and that the contract can be managed without unnecessary delay or dispute.
Key Rules
Use only when FFP is unsuitable
The contract type may not be used unless negotiations establish that the conditions for a firm-fixed-price contract are not present. The contracting officer must first determine that a standard fixed-price arrangement is not appropriate for the work.
FPI must also be inappropriate
Even if firm-fixed-price is not suitable, the contract still should not be used if a fixed-price incentive contract would be more appropriate. This requires the contracting officer to consider whether an incentive structure better fits the risk and pricing situation.
Accounting system must support redetermination
The contractor’s accounting system must be adequate for price redetermination. The Government must be able to rely on the contractor’s records and cost data to support periodic price adjustments.
Pricing periods must align
The prospective pricing periods must be capable of conforming to the contractor’s accounting system operation. In other words, the contract’s redetermination schedule has to fit the way the contractor tracks and reports costs.
Redetermination must be timely
There must be reasonable assurance that price redetermination actions will occur promptly at the specified times. The contract should be structured so that required price adjustments are not delayed or left unresolved.
Responsibilities
Contracting Officer
Determine through negotiations that firm-fixed-price is not appropriate and that fixed-price incentive contracting would not be more suitable. Verify that the contractor’s accounting system, pricing periods, and redetermination schedule can support the contract type before award.
Contractor
Maintain an accounting system adequate to support price redetermination, provide reliable cost and pricing data, and ensure its accounting periods and records can be used for timely redetermination actions.
Agency
Ensure acquisition planning and contract administration resources are in place so redetermination actions can be performed promptly at the required times and the contract type is used only when the regulatory conditions are met.
Practical Implications
This contract type is not a default choice; it requires a documented judgment that other fixed-price structures are not suitable.
A weak or poorly organized accounting system can make the contract unusable, even if the work itself seems appropriate for this pricing method.
Misalignment between pricing periods and accounting periods can create delays, disputes, or unsupported price adjustments.
Contracting officers should plan for the administrative burden of periodic redetermination and confirm that the Government can act on schedule.
Contractors should expect close scrutiny of their accounting practices and should be prepared to show that their records can support each redetermination cycle.
Official Regulatory Text
This contract type shall not be used unless- (a) Negotiations have established that- (1) The conditions for use of a firm-fixed-price contract are not present (see 16.202-2 ); and (2) A fixed-price incentive contract would not be more appropriate; (b) The contractor’s accounting system is adequate for price redetermination; (c) The prospective pricing periods can be made to conform with operation of the contractor’s accounting system; and (d) There is reasonable assurance that price redetermination actions will take place promptly at the specified times.