Firm Fixed-Price Contract (FFP)

A Firm Fixed-Price (FFP) contract establishes a set price for the described supply or service that does not vary based on the contractor's actual costs, making the contractor fully responsible for cost overruns and fully rewarded for cost underruns.

What is a Firm Fixed-Price Contract?

The FFP contract is the simplest and most common government contract type, governed by FAR 16.202. Under an FFP contract, the government agrees to pay a specified price upon delivery of the specified supplies or services. The price is fixed at award and does not change unless the parties agree to a contract modification.

Key characteristics:

• Price is fixed: regardless of whether the contractor spends more or less than anticipated
• Risk is on the contractor: if costs exceed the fixed price, the contractor absorbs the loss
• Reward is with the contractor: if the contractor completes work for less than the fixed price, it keeps the difference as additional profit
• No cost accounting required: the government has no right to audit the contractor's actual costs (unlike cost-plus contracts)
• Maximum competition incentive: contractors are fully incentivized to propose efficient approaches and control costs

FFP is the preferred contract type under FAR 16.103 because it places maximum incentive for efficiency on the contractor, requires minimal government administration, and gives the agency certainty about what it will pay.

FFP is appropriate when:

• Requirements are definite and the risk of unexpected cost growth is relatively small
• A fair and reasonable price can be established at the outset
• The contractor bears the principal risk and responsibility for costs

Common FFP applications: commercial product purchases, COTS acquisitions, routine services with well-defined scope, construction with complete specifications, and supply contracts.

Why FFP matters for government contractors

FFP contracts require accurate cost estimating before award, there is no safety net of cost reimbursement if you underestimate. Companies that win FFP contracts by underbidding and then hope to recover costs through modifications are playing a dangerous game. Strong FFP competitors invest in detailed cost buildup, schedule modeling, and risk analysis before bid submission. The upside is that every dollar of efficiency you generate below your price estimate becomes profit, a powerful incentive for innovative contractors. Many experienced GovCon companies prefer FFP because it gives them full control over their cost management and profit potential. Learn more about government contract pricing strategies.

Example

The Air Force awards an FFP contract to supply 10,000 tactical flashlights meeting specific military specifications at $45 each, $450,000 total fixed price. If the contractor's actual manufacturing and delivery costs are $38 per unit ($380,000 total), the contractor earns $70,000 in additional profit. If costs run $52 per unit ($520,000 total) due to material cost increases, the contractor absorbs the $70,000 loss, the Air Force pays $450,000 regardless. The fixed price is the price; neither party can change it unilaterally.

Frequently Asked Questions

When is FFP not appropriate?

FFP is not appropriate when requirements are not definite enough to estimate realistic costs, when there is significant technical risk that could cause large cost growth, or when market conditions make it impossible to establish a fair price at the outset. In these situations, cost-plus or time and materials contracts may be more appropriate.

What is an FFP with Economic Price Adjustment?

An FP-EPA contract starts as fixed price but includes a contractual mechanism to adjust the price if specific economic conditions change, such as labor rate escalation under a collective bargaining agreement or commodity price changes tied to a published index. The base price is fixed; the adjustment mechanism defines the conditions under which it can change.

Can the government audit an FFP contractor's costs?

Generally no. The government's audit rights in an FFP contract are much more limited than in cost-plus contracts. DCAA can audit certified cost or pricing data used to establish the price (for contracts above the Truth in Negotiations Act threshold), but has no right to audit actual performance costs unless the contract specifically includes audit clauses (which is uncommon for commercial FFP contracts).

What happens if an FFP contractor cannot complete the work?

If the contractor fails to perform, the government may terminate for default. Under default termination, the contractor may owe reprocurement costs, the amount by which the government's cost to buy the item from a replacement contractor exceeds the original contract price. This is one of the most significant financial risks in FFP contracting.