Subpart 16.2 - Fixed-Price Contracts

Parent topic: Part 16 - Types of Contracts

16.201 General.

(a) 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 products and commercial services, except as provided in 12.207(b).

(b) Time-and-materials contracts and labor-hour contracts are not fixed-price contracts.

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 products or commercial services (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 certified 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 certified cost or pricing data, the contracting

officer shall obtain adequate data 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.

16.203-4 Contract clauses.

(a) Adjustment based on established prices-standard supplies.

(1) The contracting officer shall, when contracting by negotiation, insert the clause at 52.216-2,

Economic Price Adjustment-Standard Supplies, or an agency-prescribed clause as authorized in

paragraph (a)(2) of this subsection, in solicitations and contracts when all of the following conditions

apply:

(i) A fixed-price contract is contemplated.

(ii) The requirement is for standard supplies that have an established catalog or market price.

(iii) The contracting officer has made the determination specified in 16.203-3.

(2) If all the conditions in paragraph (a)(1) of this subsection apply and the contracting officer

determines that the use of the clause at 52.216-2 is inappropriate, the contracting officer may use an

agency-prescribed clause instead of the clause at 52.216-2.

(3) If the negotiated unit price reflects a net price after applying a trade discount from a catalog or

list price, the contracting officer shall document in the contract file both the catalog or list price and

the discount. (This does not apply to prompt payment or cash discounts.)

(4) The contracting officer may modify the clause by increasing the 10 percent limit on aggregate

increases specified in 52.216-2(c)(1), upon approval by the chief of the contracting office.

(b) Adjustment based on established prices-semistandard supplies.

(1) The contracting officer shall, when contracting by negotiation, insert the clause at 52.216-3,

Economic Price Adjustment-Semistandard Supplies, or an agency-prescribed clause as authorized in

paragraph (b)(2) of this section, in solicitations and contracts when all of the following conditions

apply:

(i) A fixed-price contract is contemplated.

(ii) The requirement is for semistandard supplies for which the prices can be reasonably related to

the prices of nearly equivalent standard supplies that have an established catalog or market price.

(iii) The contracting officer has made the determination specified in 16.203-3.

(2) If all conditions in paragraph (b)(1) of this subsection apply and the contracting officer

determines that the use of the clause at 52.216-3 is inappropriate, the contracting officer may use an
agency-prescribed clause instead of the clause at 52.216-3.

(3) If the negotiated unit price reflects a net price after applying a trade discount from a catalog or

list price, the contracting officer shall document in the contract file both the catalog or list price and

the discount. (This does not apply to prompt payment or cash discounts.)

(4) Before entering into the contract, the contracting officer and contractor must agree in writing on

the identity of the standard supplies and the corresponding line items to which the clause applies.

(5) If the supplies are standard, except for preservation, packaging, and packing requirements, the

clause prescribed in 16.203-4(a) shall be used rather than this clause.

(6) The contracting officer may modify the clause by increasing the 10 percent limit on aggregate

increases specified in 52.216-3(c)(1), upon approval by the chief of the contracting office.

(c) Adjustments based on actual cost of labor or material.

(1) The contracting officer shall, when contracting by negotiation, insert a clause that is

substantially the same as the clause at 52.216-4, Economic Price Adjustment -Labor and Material, or

an agency-prescribed clause as authorized in subparagraph (c)(2) of this section, in solicitations and

contracts when all of the following conditions apply:

(i) A fixed-price contract is contemplated.

(ii) There is no major element of design engineering or development work involved.

(iii) One or more identifiable labor or material cost factors are subject to change.

(iv) The contracting officer has made the determination specified in 16.203-3.

(2) If all conditions in paragraph (c)(1) of this section apply and the contracting officer determines

that the use of the clause at 52.216-4 is inappropriate, the contracting officer may use an agencyprescribed clause instead of the clause at 52.216-4.

(3) The contracting officer shall describe in detail in the contract Schedule-

(i) The types of labor and materials subject to adjustment under the clause;

(ii) The labor rates, including fringe benefits (if any) and unit prices of materials that may be

increased or decreased; and

(iii) The quantities of the specified labor and materials allocable to each unit to be delivered under

the contract.

(4) In negotiating adjustments under the clause, the contracting officer shall-

(i) Consider work in process and materials on hand at the time of changes in labor rates, including

fringe benefits (if any) or material prices;

(ii) Not include in adjustments any indirect cost (except fringe benefits as defined in 31.205-6(m)) or

profit; and

(iii) Consider only those fringe benefits specified in the contract Schedule.
(5) The contracting officer may modify the clause by increasing the 10 percent limit on aggregate

increases specified in 52.216-4(c)(4), upon approval by the chief of the contracting office.

(d) Adjustments based on cost indexes of labor or material. The contracting officer should consider

using an economic price adjustment clause based on cost indexes of labor or material under the

circumstances and subject to approval as described in paragraphs (d)(1) and (d)(2) of this section.

(1) A clause providing adjustment based on cost indexes of labor or materials may be appropriate

when-

(i) The contract involves an extended period of performance with significant costs to be incurred

beyond 1 year after performance begins;

(ii) The contract amount subject to adjustment is substantial; and

(iii) The economic variables for labor and materials are too unstable to permit a reasonable division

of risk between the Government and the contractor, without this type of clause.

(2) Any clause using this method shall be prepared and approved under agency procedures. Because

of the variations in circumstances and clause wording that may arise, no standard clause is

prescribed.

16.204 Fixed-price incentive contracts.

A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and

establishing the final contract price by a formula based on the relationship of final negotiated total

cost to total target cost. Fixed-price incentive contracts are covered in subpart 16.4, Incentive

Contracts. See 16.403 for more complete descriptions, application, and limitations for these

contracts. Prescribed clauses are found at 16.406.

16.205 Fixed-price contracts with prospective price

redetermination.

16.205-1 Description.

A fixed-price contract with prospective price redetermination provides for-

(a) A firm fixed price for an initial period of contract deliveries or performance; and

(b) Prospective redetermination, at a stated time or times during performance, of the price for

subsequent periods of performance.

16.205-2 Application.

A fixed-price contract with prospective price redetermination may be used in acquisitions of quantity

production or services for which it is possible to negotiate a fair and reasonable firm fixed price for
an initial period, but not for subsequent periods of contract performance.

(a) The initial period should be the longest period for which it is possible to negotiate a fair and

reasonable firm fixed price. Each subsequent pricing period should be at least 12 months.

(b) The contract may provide for a ceiling price based on evaluation of the uncertainties involved in

performance and their possible cost impact. This ceiling price should provide for assumption of a

reasonable proportion of the risk by the contractor and, once established, may be adjusted only by

operation of contract clauses providing for equitable adjustment or other revision of the contract

price under stated circumstances.

16.205-3 Limitations.

This contract type shall not be used unless-

(a) Negotiations have established that-

(1) The conditions for use of a firm-fixed-price contract are not present (see 16.202-2); and

(2) A fixed-price incentive contract would not be more appropriate;

(b) The contractor’s accounting system is adequate for price redetermination;

(c) The prospective pricing periods can be made to conform with operation of the contractor’s

accounting system; and

(d) There is reasonable assurance that price redetermination actions will take place promptly at the

specified times.

16.205-4 Contract clause.

The contracting officer shall, when contracting by negotiation, insert the clause at 52.216-5, Price

Redetermination-Prospective, in solicitations and contracts when a fixed-price contract is

contemplated and the conditions specified in 16.205-2 and 16.205-3(a) through (d) apply.

16.206 Fixed-ceiling-price contracts with retroactive price

redetermination.

16.206-1 Description.

A fixed-ceiling-price contract with retroactive price redetermination provides for-

(a) A fixed ceiling price; and

(b) Retroactive price redetermination within the ceiling after completion of the contract.
16.206-2 Application.

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.

16.206-3 Limitations.

This contract type shall not be used unless-

(a) The contract is for research and development and the estimated cost is the simplified acquisition

threshold or less;

(b) The contractor’s accounting system is adequate for price redetermination;

(c) There is reasonable assurance that the price redetermination will take place promptly at the

specified time; and

(d) The head of the contracting activity (or a higher-level official, if required by agency procedures)

approves its use in writing.

16.206-4 Contract clause.

The contracting officer shall, when contracting by negotiation, insert the clause at 52.216-6, Price

Redetermination-Retroactive, in solicitations and contracts when a fixed-price contract is

contemplated and the conditions in 16.206-2 and 16.206-3(a) through (d) apply.

16.207 Firm-fixed-price, level-of-effort term contracts.

16.207-1 Description.
A firm-fixed-price, level-of-effort term contract requires-

(a) The contractor to provide a specified level of effort, over a stated period of time, on work that can

be stated only in general terms; and

(b) The Government to pay the contractor a fixed dollar amount.

16.207-2 Application.

A firm-fixed-price, level-of-effort term contract is suitable for investigation or study in a specific

research and development area. The product of the contract is usually a report showing the results

achieved through application of the required level of effort. However, payment is based on the effort

expended rather than on the results achieved.

16.207-3 Limitations.

This contract type may be used only when-

(a) The work required cannot otherwise be clearly defined;

(b) The required level of effort is identified and agreed upon in advance;

(c) There is reasonable assurance that the intended result cannot be achieved by expending less

than the stipulated effort; and

(d) The contract price is the simplified acquisition threshold or less, unless approved by the chief of

the contracting office.