Fixed-price contract
A fixed-price contract is a type of
Fixed prices can require more time, in advance, for sellers to determine the price of each item. However, the fixed-price items can each be purchased faster, but bargaining could set the price for an entire set of items being purchased, reducing the time for bulk purchases. Also, fixed-price items can help in pre-determining the value of an inventory, such as for insurance estimates.
Such contracts continue to be popular despite a history of failed or troubled projects, although they tend to work when costs are well known in advance. Some laws mandate a preference for fixed-price contracts, however, many people maintain that such contracts are actually the most expensive, especially when the risks or costs are unknown in advance.[2]
According to the Project Management Body of Knowledge (7th edition) by the Project Management Institute (PMI), fixed-price contract is an "agreement that sets the fee that will be paid for a defined scope of work regardless of the cost or effort to deliver it".[3]
Contract types
The United States' Federal Acquisition Regulation (FAR) provides for the following types of contract with a fixed price element:
- Firm-fixed-price contract (FAR 16.202)
- Fixed-price contract with economic price adjustment (FAR 16.203)
- Fixed-price contract with prospective price redetermination (FAR 16.205)
- Fixed-ceiling-price contract with retroactive price redetermination (FAR 16.206)
- Firm-fixed-price, level-of-effort term contract (FAR 16.207)
- Fixed-price incentive contract (FAR 16.403)
- Fixed-price incentive (firm target) contract (FAR 16.403-1)
- Fixed-price incentive (successive targets) contract (FAR 16.403-2)
- Fixed-price contract with award fees (FAR 16.404).[4]
Economic price adjustment may take account of increases or decreases from an established and agreed-upon price level, actual costs or a price index.[5]
Firm Fixed Price Contract (FFP)
According to the
Fixed Price Economic Price Adjustment Contract (FPEPA)
According to the
Fixed Price Incentive Fee Contract (FPIF)
According to the
Usage
US government procurement policy strongly favours use of fixed-price contracts,[7] although Federal Acquisition Regulations do outline when they are "suitable" and the necessary basis on which "fair and reasonable prices" can be determined.[1]: Part 16.202-2 They are suitable, in particular, for the supply of products available commercially.[7]
Fixed-price contracts are often used by military and government contractors to require vendors to incur the risk of cost overruns, and to control costs. However, historically when such contracts are used for innovative new projects with untested or undeveloped technologies (such as new military transports or stealth attack airplanes), it often results in failure if costs greatly exceed the ability of the contractor to absorb unexpected cost overruns.[opinion]
Examples
Aerospace manufacturing
A400M transport aircraft
A-12 Avenger II
The U.S.
KC-46 Pegasus
The U.S. Boeing KC-46 Pegasus contract was a fixed price contract. Due to its history of cost overruns, it is an example of how fixed price contracts place the risk upon the vendor, in this case Boeing. Total cost overruns for this aircraft have totaled about $1.9 billion.[10] However, Boeing was able to absorb those costs and has gained US Air Force approval to begin producing the KC-46.[11]
Construction
The Canadian Construction Documents Committee's "Stipulated Price Contract" (CCDC-2), revised in February 2008, provides for a property owner and
Citations
- ^ a b General Services Administration, Federal Acquisition Regulation Subpart 16.2 - Fixed-Price Contracts, effective 12 April 2023, accessed 16 January 2024
- ^ Weigelt, M. (2009), Fixed-price contracts required by stimulus law Archived 2021-12-04 at the Wayback Machine, 17 February 2009
- ^ a b c d Project Management Institute 2021, Glossary §3 Definitions.
- ^ Federal Acquisition Regulation, Part 16 - Types of Contract Archived 2019-12-14 at the Wayback Machine, accessed 14 December 2019
- ^ Federal Acquisition Regulation, 16.203-1 Description Archived 2019-12-14 at the Wayback Machine, accessed 14 December 2019
- ^ Department of Defense, Memorandum on Managing the Effects of Inflation with Existing Contracts, updated 9 September 2022, accessed 5 September 2023
- ^ a b Frick, D. E., Risk in Fixed-Price Contracts, Defense AT&L, November-December 2013, accessed 16 January 2024
- ISSN 0013-0613. Retrieved 2021-05-26.
- ^ A-12 Avenger II Advanced Tactical Aircraft (ATA) - 1983-1991
- ^ "Boeing Racks Up Another $393M In Cost Overruns On KC-46 Program". 21 July 2016. Retrieved 2016-08-15.
- ^ "Air Force approves first round of KC-46 tanker production". Retrieved 2016-08-15.
- ^ Pawson, O., "Stipulated Price Contract", Canadian Consulting Engineer, accessed 14 December 2019
References
- Allan, B. (2004). Project management. 1st ed. London: Facet.
- Fleming, Quentin; Koppelman, Joel (2005). Earned Value Project Management (Third ed.). Project Management Institute. ISBN 1-930699-89-1.
- Project Management Institute (2021). A guide to the project management body of knowledge (PMBOK guide). Project Management Institute (7th ed.). Newtown Square, PA. ISBN 978-1-62825-664-2.)
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