FAR 16.206-2—Application.
Plain-English Summary
FAR 16.206-2 explains when a fixed-ceiling-price contract with retroactive price redetermination may be used and what must happen before award. It is aimed at research and development contracts at or below the simplified acquisition threshold when the government and contractor cannot negotiate a fair and reasonable firm fixed price at the outset, and when the dollar amount and short performance period make other fixed-price contract types impracticable. The section also addresses how to set the ceiling price, when that ceiling may be changed, how the billing price should be negotiated, and what the contracting officer must communicate to the contractor about how performance will be evaluated in the later price redetermination. In practice, this is a narrow, specialized contract type used only when normal fixed-price approaches do not fit the circumstances. Its purpose is to allow award to proceed despite pricing uncertainty while still protecting the government through a negotiated ceiling and later retroactive price adjustment based on the contractor’s actual performance and management effectiveness.
Key Rules
Use only in narrow R&D cases
This contract type is appropriate only for research and development contracts estimated at or below the simplified acquisition threshold. It is intended for situations where a fair and reasonable firm fixed price cannot be negotiated at the outset and where the short performance period and small dollar value make other fixed-price contract types impracticable.
Negotiate a reasonable ceiling
The contracting officer must negotiate a ceiling price at a level that reflects a reasonable sharing of risk by the contractor. The ceiling is the upper limit on price unless later changed under an applicable contract clause.
Ceiling changes are limited
Once established, the ceiling price may be adjusted only if a contract clause allows an equitable adjustment or another stated revision of contract price. The ceiling is not meant to be freely reopened just because actual costs differ from expectations.
Billing price must be fair
The contract should be awarded only after the parties negotiate a billing price that is as fair and reasonable as the circumstances permit. This billing price is the amount used for interim billing, even though the final price will be redetermined later.
Explain performance will matter
Before award, the contracting officer should make clear that the contractor’s management effectiveness and ingenuity will be considered when the price is retroactively redetermined. Because the contractor has little cost-control incentive beyond the ceiling, this discussion is important to set expectations.
Responsibilities
Contracting Officer
Determine that the contract fits the narrow applicability standard, negotiate a reasonable ceiling price and a fair billing price, ensure the ceiling reflects a reasonable sharing of risk, and clearly explain before award how management effectiveness and ingenuity will affect retroactive price redetermination.
Contractor
Accept the ceiling-price structure, understand that interim billing does not equal final compensation, and perform with awareness that management effectiveness and ingenuity may influence the final redetermined price.
Agency
Use this contract type only when the acquisition circumstances justify it, particularly when a firm fixed price cannot be negotiated and other fixed-price types are impracticable for the short, low-dollar R&D effort.
Practical Implications
This is a specialized fallback pricing method, not a routine substitute for firm fixed-price contracting.
The ceiling price is critical: if it is set too low, the contractor bears excessive risk; if too high, the government loses protection.
Because the contractor has limited cost-control incentive, the contracting officer should document the rationale for using this type and the basis for the ceiling and billing prices.
A common pitfall is treating the billing price as if it were the final price; it is only an interim payment basis pending retroactive redetermination.
Clear pre-award communication matters because the contractor must understand that performance quality, management, and ingenuity can affect the final price outcome.
Official Regulatory Text
A fixed-ceiling-price contract with retroactive price redetermination is appropriate for research and development contracts estimated at the simplified acquisition threshold or less when it is established at the outset that a fair and reasonable firm fixed price cannot be negotiated and that the amount involved and short performance period make the use of any other fixed-price contract type impracticable. (a) A ceiling price shall be negotiated for the contract at a level that reflects a reasonable sharing of risk by the contractor. The established ceiling price may be adjusted only if required by the operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances. (b) The contract should be awarded only after negotiation of a billing price that is as fair and reasonable as the circumstances permit. (c) Since this contract type provides the contractor no cost control incentive except the ceiling price, the contracting officer should make clear to the contractor during discussion before award that the contractor’s management effectiveness and ingenuity will be considered in retroactively redetermining the price.