### FIXED PRICE CONTRACTS

### Subpart 16.2- Fixed-Price Contracts 

## 16.201 General. 

Fixed-price types of contracts provide for a firm price or, in
appropriate cases, an adjustable price. Fixed-price contracts providing
for an adjustable price may include a ceiling price, a target price
(including target cost), or both. Unless otherwise specified in the
contract, the ceiling price or target price is subject to adjustment
only by operation of contract clauses providing for equitable adjustment
or other revision of the contract price under stated circumstances. The
contracting officer shall use firm-fixed-price or fixed-price with
economic price adjustment contracts when acquiring commercial items.

## 16.202 Firm-fixed-price contracts. 

## 16.202-1 Description. 

A firm-fixed-price contract provides for a price that is not subject to
any adjustment on the basis of the contractor\'s cost experience in
performing the contract. This contract type places upon the contractor
maximum risk and full responsibility for all costs and resulting profit
or loss. It provides maximum incentive for the contractor to control
costs and perform effectively and imposes a minimum administrative
burden upon the contracting parties. The contracting officer may use a
firm-fixed-price contract in conjunction with an award-fee incentive
(see 16.404) and performance or delivery incentives (see 16.402-2 and
16.402-3) when the award fee or incentive is based solely on factors
other than cost. The contract type remains firm-fixed-price when used
with these incentives.

## 16.202-2 Application. 

A firm-fixed-price contract is suitable for acquiring commercial items
(see Parts 2 and 12) or for acquiring other supplies or services on the
basis of reasonably definite functional or detailed specifications (see
Part 11) when the contracting officer can establish fair and reasonable
prices at the outset, such as when-

\(a\) There is adequate price competition;

\(b\) There are reasonable price comparisons with prior purchases of the
same or similar supplies or services made on a competitive basis or
supported by valid cost or pricing data;

\(c\) Available cost or pricing information permits realistic estimates
of the probable costs of performance; or

\(d\) Performance uncertainties can be identified and reasonable
estimates of their cost impact can be made, and the contractor is
willing to accept a firm fixed price representing assumption of the
risks involved.

## 16.203 Fixed-price contracts with economic price adjustment. 

## 16.203-1 Description. 

\(a\) A fixed-price contract with economic price adjustment provides for
upward and downward revision of the stated contract price upon the
occurrence of specified contingencies. Economic price adjustments are of
three general types:

\(1\) *Adjustments based on established prices.* These price adjustments
are based on increases or decreases from an agreed-upon level in
published or otherwise established prices of specific items or the
contract end items.

\(2\) *Adjustments based on actual costs of labor or material*. These
price adjustments are based on increases or decreases in specified costs
of labor or material that the contractor actually experiences during
contract performance.

\(3\) *Adjustments based on cost indexes of labor or material*. These
price adjustments are based on increases or decreases in labor or
material cost standards or indexes that are specifically identified in
the contract.

\(b\) The contracting officer may use a fixed-price contract with
economic price adjustment in conjunction with an award-fee incentive
(see 16.404) and performance or delivery incentives (see 16.402-2 and
16.402-3) when the award fee or incentive is based solely on factors
other than cost. The contract type remains fixed-price with economic
price adjustment when used with these incentives.

## 16.203-2 Application. 

A fixed-price contract with economic price adjustment may be used when
(i) there is serious doubt concerning the stability of market or labor
conditions that will exist during an extended period of contract
performance, and (ii) contingencies that would otherwise be included in
the contract price can be identified and covered separately in the
contract. Price adjustments based on established prices should normally
be restricted to industry-wide contingencies. Price adjustments based on
labor and material costs should be limited to contingencies beyond the
contractor\'s control. For use of economic price adjustment in sealed
bid contracts, see 14.408-4.

\(a\) In establishing the base level from which adjustment will be made,
the contracting officer shall ensure that contingency allowances are not
duplicated by inclusion in both the base price and the adjustment
requested by the contractor under economic price adjustment clause.

\(b\) In contracts that do not require submission of cost or pricing
data, the contracting officer shall obtain adequate information to
establish the base level from which adjustment will be made and may
require verification of data submitted.

## 16.203-3 Limitations. 

A fixed-price contract with economic price adjustment shall not be used
unless the contracting officer determines that it is necessary either to
protect the contractor and the Government against significant
fluctuations in labor or material costs or to provide for contract price
adjustment in the event of changes in the contractor\'s established
prices.

### COST REIMBURSEMENT CONTRACTS

### Subpart 16.3- Cost-Reimbursement Contracts 

## 16.301 General. 

## 16.301-1 Description. 

Cost-reimbursement types of contracts provide for payment of allowable
incurred costs, to the extent prescribed in the contract. These
contracts establish an estimate of total cost for the purpose of
obligating funds and establishing a ceiling that the contractor may not
exceed (except at its own risk) without the approval of the contracting
officer.

## 16.301-2 Application. 

Cost-reimbursement contracts are suitable for use only when
uncertainties involved in contract performance do not permit costs to be
estimated with sufficient accuracy to use any type of fixed-price
contract.

## 16.301-3 Limitations. 

\(a\) A cost-reimbursement contract may be used only when-

\(1\) The contractor\'s accounting system is adequate for determining
costs applicable to the contract; and

\(2\) Appropriate Government surveillance during performance will
provide reasonable assurance that efficient methods and effective cost
controls are used.

\(b\) The use of cost-reimbursement contracts is prohibited for the
acquisition of commercial items (see Parts 2 and 12).

## 16.302 Cost contracts. 

\(a\) *Description.* A cost contract is a cost-reimbursement contract in
which the contractor receives no fee.

\(b\) *Application*. A cost contract may be appropriate for research and
development work, particularly with nonprofit educational institutions
or other nonprofit organizations, and for facilities contracts.

\(c\) *Limitations*. See 16.301-3.

## 16.303 Cost-sharing contracts. 

\(a\) *Description.* A cost-sharing contract is a cost-reimbursement
contract in which the contractor receives no fee and is reimbursed only
for an agreed-upon portion of its allowable costs.

\(b\) *Application*. A cost-sharing contract may be used when the
contractor agrees to absorb a portion of the costs, in the expectation
of substantial compensating benefits.

\(c\) *Limitations*. See 16.301-3.

## 16.304 Cost-plus-incentive-fee contracts. 

A cost-plus-incentive-fee contract is a cost-reimbursement contract that
provides for an initially negotiated fee to be adjusted later by a
formula based on the relationship of total allowable costs to total
target costs. Cost-plus-incentive-fee contracts are covered in Subpart
16.4, Incentive Contracts. See 16.405-1 for a more complete description
and discussion of application of these contracts. See 16.301-3 for
limitations.

## 16.305 Cost-plus-award-fee contracts. 

A cost-plus-award-fee contract is a cost-reimbursement contract that
provides for a fee consisting of (a) a base amount (which may be zero)
fixed at inception of the contract and (b) an award amount, based upon a
judgmental evaluation by the Government, sufficient to provide
motivation for excellence in contract performance. Cost-plus-award-fee
contracts are covered in Subpart 16.4, Incentive Contracts. See 16.405-2
for a more complete description and discussion of application of these
contracts. See 16.301-3 and 16.405-2(c) for limitations.

## 16.306 Cost-plus-fixed-fee contracts. 

\(a\) *Description.* A cost-plus-fixed-fee contract is a
cost-reimbursement contract that provides for payment to the contractor
of a negotiated fee that is fixed at the inception of the contract. The
fixed fee does not vary with actual cost, but may be adjusted as a
result of changes in the work to be performed under the contract. This
contract type permits contracting for efforts that might otherwise
present too great a risk to contractors, but it provides the contractor
only a minimum incentive to control costs.

\(b\) *Application*.

\(1\) A cost-plus-fixed-fee contract is suitable for use when the
conditions of 16.301-2 are present and, for example-

\(i\) The contract is for the performance of research or preliminary
exploration or study, and the level of effort required is unknown; or

\(ii\) The contract is for development and test, and using a
cost-plus-incentive-fee contract is not practical.

\(2\) A cost-plus-fixed-fee contract normally should not be used in
development of major systems (see Part 34) once preliminary exploration,
studies, and risk reduction have indicated a high degree of probability
that the development is achievable and the Government has established
reasonably firm performance objectives and schedules.

\(c\) *Limitations*. No cost-plus-fixed-fee contract shall be awarded
unless the contracting officer complies with all limitations in
15.404-4(c)(4)(i) and 16.301-3.

\(d\) *Completion and term forms*. A cost-plus-fixed-fee contract may
take one of two basic forms-completion or term.

\(1\) The completion form describes the scope of work by stating a
definite goal or target and specifying an end product. This form of
contract normally requires the contractor to complete and deliver the
specified end product (*e.g.*, a final report of research accomplishing
the goal or target) within the estimated cost, if possible, as a
condition for payment of the entire fixed fee. However, in the event the
work cannot be completed within the estimated cost, the Government may
require more effort without increase in fee, provided the Government
increases the estimated cost.

\(2\) The term form describes the scope of work in general terms and
obligates the contractor to devote a specified level of effort for a
stated time period. Under this form, if the performance is considered
satisfactory by the Government, the fixed fee is payable at the
expiration of the agreed-upon period, upon contractor statement that the
level of effort specified in the contract has been expended in
performing the contract work. Renewal for further periods of performance
is a new acquisition that involves new cost and fee arrangements.

\(3\) Because of the differences in obligation assumed by the
contractor, the completion form is preferred over the term form whenever
the work, or specific milestones for the work, can be defined well
enough to permit development of estimates within which the contractor
can be expected to complete the work.

\(4\) The term form shall not be used unless the contractor is obligated
by the contract to provide a specific level of effort within a definite
time period.

## 16.307 Contract clauses. 

(a)(1) The contracting officer shall insert the clause at 52.216-7,
Allowable Cost and Payment, in solicitations and contracts when a
cost-reimbursement contract (other than a facilities contract) is
contemplated. If the contract is with an educational institution, modify
the clause by deleting from paragraph (a) the words \"Subpart 31.2\" and
substituting for them \"Subpart 31.3.\" If the contract is with a State
or local government, modify the clause by deleting from paragraph (a)
the words \"Subpart 31.2\" and substituting for them \"Subpart 31.6.\'\'
If the contract is with a nonprofit organization other than an
educational institution, a State or local government, or a nonprofit
organization exempted under OMB Circular No. A-122, modify the clause by
deleting from paragraph (a) the words \"Subpart 31.2\" and substituting
for them \"Subpart 31.7.\"

\(2\) If the contract is a construction contract and contains the clause
at 52.232-27, Prompt Payment for Construction Contracts, the contracting
officer shall use the clause at 52.216-7 with its Alternate I.

\(b\) The contracting officer shall insert the clause at 52.216-8, Fixed
Fee, in solicitations and contracts when a cost-plus-fixed-fee contract
(other than a facilities contract or a construction contract) is
contemplated.

\(c\) The contracting officer shall insert the clause at 52.216-9,
Fixed-Fee-Construction, in solicitations and contracts when a
cost-plus-fixed-fee construction contract is contemplated.

\(d\) The contracting officer shall insert the clause at 52.216-10,
Incentive Fee, in solicitations and contracts when a
cost-plus-incentive-fee contract (other than a facilities contract) is
contemplated.

(e)(1) The contracting officer shall insert the clause at 52.216-11,
Cost Contract-No Fee, in solicitations and contracts when a
cost-reimbursement contract is contemplated that provides no fee and is
not a cost-sharing contract or a facilities contract.

\(2\) If a cost-reimbursement research and development contract with an
educational institution or a nonprofit organization that provides no fee
or other payment above cost and is not a cost-sharing contract is
contemplated, and if the contracting officer determines that withholding
of a portion of allowable costs is not required, the contracting officer
shall use the clause with its Alternate I.

(f)(1) The contracting officer shall insert the clause at 52.216-12,
Cost-Sharing Contract-No Fee, in solicitations and contracts when a
cost-sharing contract (other than a facilities contract) is
contemplated.

\(2\) If a cost-sharing research and development contract with an
educational institution or a nonprofit organization is contemplated, and
if the contracting officer determines that withholding of a portion of
allowable costs is not required, the contracting officer shall use the
clause with its Alternate I.

(g)(1) The contracting officer shall insert the clause at 52.216-13,
Allowable Cost and Payment-Facilities, in solicitations and contracts
when a cost-reimbursement consolidated facilities contract or a
cost-reimbursement facilities acquisition contract (see 45.302-6) is
contemplated.

\(2\) If a facilities acquisition contract is contemplated and, in the
judgment of the contracting officer, it may be necessary to withhold
payment of an amount to protect the Government\'s interest, the
contracting officer shall use the clause with its Alternate I.

\(h\) The contracting officer shall insert the clause at 52.216-14,
Allowable Cost and Payment-Facilities Use, in solicitations and
contracts when a facilities use contract is contemplated.

\(i\) The contracting officer shall insert the clause at 52.216-15,
Predetermined Indirect Cost Rates, in solicitations and contracts when a
cost-reimbursement research and development contract with an educational
institution (see 42.705-3(b)) is contemplated and predetermined indirect
cost rates are to be used. If the contract is a facilities contract,
modify paragraph (c) by deleting the words \"Subpart 31.1\" and
substituting for them \"section 31.106.\"