Fixed Price Contracts

Fixed price contracts are a bit self-explanatory. You propose a single price to accomplish the work being sought. Once the project is complete the government customer pays you the agreed to price. Your cost to complete the work does not factor into how much you are paid.

Types of Fixed Price Contracts

Firm Fixed Price or FFP contracts have detailed requirements and a price for the work. The price is negotiated before the contract is finalized and does not vary even if the contractor needs to expend more or less resources than planned. Firm fixed price contracts require the contractor to manage the costs of the work in order to make a profit. If more work than planned is required then the contractor may lose money on the contract.

Fixed Price Contract with Incentive Firm Target (FPIF) contract is a firm fixed price type contract (as compared to a cost reimbursable). The fee can vary depending on whether the contract comes in above or below planned cost. These contracts do contain a ceiling price to limit the government’s exposure to cost overruns.

Fixed price with economic price adjustment contracts are fixed price contracts but they contain a provision to account for contingencies and changing costs. An example is the contract may contain an adjustment for an annual salary increase.

Computing Fixed Price

Fixed price contracts can be lucrative or cause a big loss to a company. Computing the proposed fixed price follows a similar to cost plus contract pricing. Study the request for proposals carefully determining the scope of work to be completed, labor categories of personnel needed and materials to be procured. A conservative approach to scoping the work (resulting a higher proposed cost) is preferred to offset the risk level of the work taking more effort and money than planned. However, if you propose too high a price you could lose the contract by not being competitive.

Start computing the fixed price you will propose by creating a general work breakdown structure (WBS) for the project. Using the work breakdown structure you can estimate the number of labor hours by labor category needed to complete each phase of the project. Add in the materials, travel and other direct costs to the labor (priced at your labor rates) to get the proposed contract cost. Add fringe, overhead and general & administrative rates to the appropriate costs to get the proposed project cost.

Fee is then added to the planned cost to obtain the final fixed price you will propose. When deciding the fee take careful account of the amount of risk you have in the project not going at least as well as planned. Any risk of cost overruns should be factored into the fee. If you feel confident you can complete the work in the proposed costs then you can reduce your fee to be more competitive. For example, if the contract is to provide mowing services on base then you can estimate the amount of labor that will be required fairly accurately since the amount of mowing is well defined. If the contract is to develop a new, renewable fuel type for tanks then your risk of incurring more costs than planned is much greater. Fee rates can range from a couple of percent to 15% depending on the risk level. Note that the government and your competitors are also computing the project risk level and the related fee so be reasonable and realistic in your computations.

Proposing the Fixed Price

Here is where the couple of fixed price contracts come into play. When finalizing the price you will propose know the fee type required in the request for proposals. If an economic adjustment is allowed then you will need to propose what this percentage will be for each year of the contract. This is also called the escalation. Modify the computed fixed price to match the request for proposals and submit your winning proposal.

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Your Citation
Bame, Michael. "Fixed Price Contracts." ThoughtCo, Feb. 16, 2021, Bame, Michael. (2021, February 16). Fixed Price Contracts. Retrieved from Bame, Michael. "Fixed Price Contracts." ThoughtCo. (accessed August 3, 2021).