FAR 16.205—Fixed-price contracts with prospective price redetermination.

Description.

FAR 16.205-1 describes the basic structure of a fixed-price contract with prospective price redetermination. This section covers two core features: first, a firm fixed price applies to an initial period of deliveries or performance; second, the contract includes scheduled points during performance when the price for later periods will be redetermined prospectively. In practice, this means the contractor and the Government agree up front to a fixed price for the near term, while preserving a mechanism to reset prices for future work based on information available at the time of redetermination. The purpose is to give both sides more pricing stability than a cost-type arrangement while still allowing adjustment when long-term pricing is uncertain. This structure is most useful when the work extends over time and future costs cannot be reliably fixed at award for the entire period. For contracting officers and contractors, the key practical significance is that the initial price is firm only for the stated initial period, and later pricing depends on the contract’s redetermination schedule and terms.

Application.

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.

Limitations.

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.

Contract clause.

FAR 16.205-4 tells contracting officers when they must include the Price Redetermination-Prospective clause at FAR 52.216-5 in negotiated solicitations and contracts. It applies only when the Government is contemplating a fixed-price contract and the conditions in FAR 16.205-2 and 16.205-3(a) through (d) are present, meaning the contract is being used in a situation where future price redetermination is appropriate because of uncertainty in costs or other specified circumstances. In practice, this section is a clause-insertion rule: it does not itself create the pricing method, but it requires the contracting officer to put the correct clause in the solicitation and resulting contract so the parties know how the price will later be adjusted. The section matters because it protects both the Government and the contractor by making the pricing mechanism explicit up front, reducing disputes over whether and how the fixed price may be redetermined. It also signals that the contracting officer must confirm the underlying conditions in the related sections before using this clause. For contractors, this means the solicitation and contract will include a prospective redetermination process that can affect pricing strategy, risk allocation, and recordkeeping.