Firm-Fixed-Price Contract (FFP)

How It Works

Firm-fixed-price (FFP) contracts, authorized under FAR Subpart 16.2, are the simplest and most common type of federal contract. The price is agreed upon at award and does not change based on the contractor's actual costs, the contractor bears the full risk of cost overruns and keeps any savings from efficient performance. FFP is preferred by the FAR whenever requirements are well-defined and costs can be reasonably estimated: buying commercial products, routine services (janitorial, guard services, facilities maintenance), well-established technology, and production runs after R&D is complete. Roughly 60-65% of federal contract dollars are awarded on fixed-price vehicles (FFP plus variants like FFP-EPA with economic price adjustments, and FP-Incentive). The FAR explicitly states a preference for fixed-price over cost-reimbursement whenever feasible, part of a broader "share in savings" policy push that has intensified since the 2008 Weapons System Acquisition Reform Act. Fixed-price does not mean unchangeable, scope changes can still trigger equitable-adjustment modifications, and economic price adjustment clauses may allow price changes for labor or material indices. The Truth in Negotiations Act (TINA, now Truthful Cost or Pricing Data Act) requires contractors to submit certified cost or pricing data for sole-source fixed-price actions above $2 million so the government can verify the price is fair and reasonable. Defective pricing, knowingly submitting inflated cost data, has been the basis for hundreds of millions in False Claims Act settlements over the years, including major settlements by Lockheed Martin, Boeing, and RTX. FFP contracts typically run 6 months to 5 years in duration, with options extending the total vehicle up to 5 years under FAR 17.204(e). For commercial services and well-understood products, FFP is typically the only contract type considered; for developmental work with significant risk, FFP-Incentive (FP-IF) variants share cost risk between government and contractor through a sharing formula up to a ceiling price.

Related Terms

• Cost-Plus Contract, A contract where the government reimburses the contractor for allowable costs plus a fee (profit), used for complex projects where total costs are hard to predict upfront.
• Federal Contract, A legally binding agreement between the U.S. government and a private company to provide goods or services, from fighter jets to IT consulting.
• TINA Threshold (Truth in Negotiations Act / TINA), The $2 million threshold above which contractors must submit certified cost or pricing data in sole-source procurements, so the government can verify the price is fair and reasonable.