FAR 52.203-10—Price or Fee Adjustment for Illegal or Improper Activity.
Plain-English Summary
FAR 52.203-10 implements the government’s remedy for violations of the procurement integrity restrictions in 41 U.S.C. 2102 and 2103, as implemented in FAR 3.104. This clause tells contracting officers and contractors what happens when the head of the contracting activity or designee determines that an illegal or improper activity occurred, including the government’s right to reduce price or fee on different contract types. It covers fixed-price contracts, cost-reimbursement contracts, incentive contracts, award-fee contracts, and the special treatment of fixed-price-incentive contracts, with different formulas depending on the pricing arrangement. It also addresses pass-through liability for subcontractor violations, allowing the government to reduce the prime contractor’s price or fee based on subcontractor misconduct, subject to a cap tied to the subcontract profit or fee. Finally, it preserves broader government remedies, including default termination and any other rights available by law or under the contract. In practice, this clause is a strong deterrent and recovery tool: it can directly affect contractor earnings, create exposure for prime contractors based on subcontractor conduct, and operate alongside other procurement integrity and enforcement remedies.
Key Rules
Trigger is a formal violation finding
The clause applies only if the head of the contracting activity or designee determines there was a violation of 41 U.S.C. 2102 or 2103, as implemented in FAR 3.104. The government then has discretion to reduce price or fee; the reduction is not automatic.
Government may reduce price or fee
The government may elect to reduce the price of a fixed-price contract or the total cost and fee under a cost-type contract. The remedy is framed as a reduction in compensation, not merely a separate penalty.
Different formulas by contract type
The amount reduced depends on the contract structure. The clause specifies separate measures for cost-plus-fixed-fee, cost-plus-incentive-fee, cost-plus-award-fee, fixed-price-incentive, and firm-fixed-price contracts.
Award-fee contracts have special rules
For cost-plus-award-fee contracts, the reduction is the base fee if one exists. If no base fee is specified, the government reduces each award fee payment by 30 percent for each evaluation period or determination point.
Fixed-price-incentive contracts may be adjusted later
For fixed-price-incentive contracts, the government may reduce target price and target profit immediately by the initial target profit, or defer the adjustment if an immediate change would disrupt the incentive relationship or financing provisions. In that case, the final contract price is reduced when the total final price is established.
Firm-fixed-price reduction is capped and may be evidence-based
For firm-fixed-price contracts, the reduction is 10 percent of the initial contract price or a profit amount the contracting officer determines from records or documents existing before award. This gives the government a floor-based remedy while allowing a documented alternative amount.
Subcontractor violations can affect the prime
The government may reduce a prime contractor’s price or fee for subcontractor violations, using the same procedures as paragraph (b). The reduction cannot exceed the profit or fee reflected in the subcontract when it was first definitively priced.
Other remedies remain available
The clause expressly preserves the government’s right to terminate for default and to pursue any other rights and remedies available by law or under the contract. The price or fee reduction is cumulative with, not exclusive of, other enforcement tools.
Responsibilities
Head of the Contracting Activity or Designee
Determine whether a violation of 41 U.S.C. 2102 or 2103 occurred. This determination is the predicate for invoking the clause’s price or fee reduction remedies.
Contracting Officer
Apply the appropriate reduction formula based on contract type, decide whether to reduce the prime contractor’s compensation for subcontractor violations, and manage timing issues for fixed-price-incentive contracts when immediate adjustment would be disruptive.
Government
Elect whether to pursue a price or fee reduction, calculate the reduction under the applicable contract-type rule, and preserve or exercise additional remedies such as default termination when appropriate.
Prime Contractor
Absorb any authorized reduction in price or fee if a violation is found, including reductions tied to subcontractor misconduct, and maintain records that may be used to determine the amount of reduction.
Subcontractor
Avoid conduct that violates the procurement integrity restrictions; misconduct can indirectly reduce the prime contractor’s compensation even though the subcontractor is not the direct recipient of the government contract remedy.
Practical Implications
This clause can materially reduce contractor earnings, so procurement integrity compliance is not just a legal issue but a direct financial risk issue.
Contract type matters a great deal: the same violation can produce very different dollar consequences depending on whether the contract is fixed-price, cost-reimbursement, incentive, or award-fee.
Prime contractors need strong subcontract oversight because subcontractor violations can trigger reductions against the prime, subject to the subcontract profit/fee cap.
For fixed-price-incentive contracts, timing matters; an immediate reduction may be deferred if it would distort the incentive structure or financing terms.
The clause is not the government’s only remedy, so contractors should not assume a price or fee reduction resolves the matter or limits exposure to termination or other enforcement actions.
Official Regulatory Text
As prescribed in 3.104-9 (b) , insert the following clause: Price or Fee Adjustment for Illegal or Improper Activity (May 2014) (a) The Government, at its election, may reduce the price of a fixed-price type contract and the total cost and fee under a cost-type contract by the amount of profit or fee determined as set forth in paragraph (b) of this clause if the head of the contracting activity or designee determines that there was a violation of 41 U.S.C.2102 or 2103, as implemented in section 3.104 of the Federal Acquisition Regulation. (b) The price or fee reduction referred to in paragraph (a) of this clause shall be- (1) For cost-plus-fixed-fee contracts, the amount of the fee specified in the contract at the time of award; (2) For cost-plus-incentive-fee contracts, the target fee specified in the contract at the time of award, notwithstanding any minimum fee or "fee floor" specified in the contract; (3) For cost-plus-award-fee contracts- (i) The base fee established in the contract at the time of contract award; (ii) If no base fee is specified in the contract, 30 percent of the amount of each award fee otherwise payable to the Contractor for each award fee evaluation period or at each award fee determination point. (4) For fixed-price-incentive contracts, the Government may- (i) Reduce the contract target price and contract target profit both by an amount equal to the initial target profit specified in the contract at the time of contract award; or (ii) If an immediate adjustment to the contract target price and contract target profit would have a significant adverse impact on the incentive price revision relationship under the contract, or adversely affect the contract financing provisions, the Contracting Officer may defer such adjustment until establishment of the total final price of the contract. The total final price established in accordance with the incentive price revision provisions of the contract shall be reduced by an amount equal to the initial target profit specified in the contract at the time of contract award and such reduced price shall be the total final contract price. (5) For firm-fixed-price contracts, by 10 percent of the initial contract price or a profit amount determined by the Contracting Officer from records or documents in existence prior to the date of the contract award. (c) The Government may, at its election, reduce a prime contractor’s price or fee in accordance with the procedures of paragraph (b) of this clause for violations of the statute by its subcontractors by an amount not to exceed the amount of profit or fee reflected in the subcontract at the time the subcontract was first definitively priced. (d) In addition to the remedies in paragraphs (a) and (c) of this clause, the Government may terminate this contract for default. The rights and remedies of the Government specified herein are not exclusive, and are in addition to any other rights and remedies provided by law or under this contract. (End of clause)