FAR 46.707—Pricing aspects of fixed-price incentive contract warranties.
Plain-English Summary
FAR 46.707 addresses how warranty costs are treated when a fixed-price incentive contract includes a warranty under FAR 46.708. Its purpose is to make sure the pricing structure of the contract reflects the contractor’s expected warranty obligations from the start, rather than treating warranty performance as an afterthought. In practice, this means the estimated cost of the warranty must be considered when setting both the incentive target price and the ceiling price, and all costs the contractor has incurred or reasonably expects to incur to comply with the warranty must be included when establishing the total final price. The section also makes clear that once the total final price is set, the contractor must satisfy the warranty without any additional cost to the Government. For contracting officers, this is a pricing and risk-allocation rule; for contractors, it is a reminder that warranty obligations can affect both negotiated pricing and post-award performance costs. The section ties warranty obligations directly to the economics of fixed-price incentive contracting, ensuring the Government does not pay twice for warranty coverage and that the contractor’s pricing reflects the full cost of promised warranty performance.
Key Rules
Warranty cost must be priced in
If a fixed-price incentive contract includes a warranty, the estimated cost of that warranty should be considered when establishing the incentive target price and the ceiling price. This ensures the contract price structure reflects the contractor’s expected warranty burden.
Final price includes warranty compliance costs
All costs incurred, or expected to be incurred, by the contractor to comply with the warranty must be considered when determining the total final price. The pricing process must account for the full economic impact of warranty performance.
No extra Government cost after final price
Once the total final price is established, the contractor must comply with the warranty at no additional cost to the Government. The Government should not pay separately for warranty performance already built into the contract pricing.
Applies only when warranty exists
This section applies when a fixed-price incentive contract contains a warranty, as referenced in FAR 46.708. If there is no warranty, these pricing considerations do not apply.
Responsibilities
Contracting Officer
Ensure the estimated cost of any warranty is considered when negotiating the incentive target price and ceiling price, and ensure warranty-related costs are reflected in the total final price. The contracting officer must also make sure the contract structure clearly places warranty compliance at no additional cost to the Government after the final price is set.
Contractor
Estimate and account for the cost of warranty compliance in its pricing proposal and performance planning. After the total final price is established, the contractor must fulfill warranty obligations without seeking additional payment from the Government.
Agency
Use pricing and negotiation practices that properly incorporate warranty costs into fixed-price incentive contracts and avoid structuring the contract so that warranty obligations are effectively paid for twice or left outside the negotiated price framework.
Practical Implications
Warranty obligations can materially affect the target price, ceiling price, and final negotiated price, so they should be analyzed early in acquisition planning and proposal evaluation.
A common pitfall is failing to include realistic warranty administration, repair, replacement, labor, and material costs in the pricing model, which can distort the incentive structure.
Contracting officers should verify that the contract’s pricing assumptions and warranty language are aligned; unclear warranty terms can lead to disputes over what costs were already priced in.
Contractors should treat warranty exposure as a real cost element, not a post-award contingency, because the Government is not expected to pay extra once the final price is set.
This section helps prevent double payment for warranty coverage and reinforces that warranty performance is part of the bargain in a fixed-price incentive arrangement.
Official Regulatory Text
If a fixed-price incentive contract contains a warranty (see 46.708 ), the estimated cost of the warranty to the contractor should be considered in establishing the incentive target price and the ceiling price of the contract. All costs incurred, or estimated to be incurred, by the contractor in complying with the warranty shall be considered when establishing the total final price. Contractor compliance with the warranty after the establishment of the total final price shall be at no additional cost to the Government.