Frequently Asked Questions
What is a fixed price contract and what are its common types?
A fixed price (FP) contract is a type of agreement that involves a predetermined price for a product or service. This type of contract can also include additional incentives when a company meets or exceeds specific objectives on certain projects. The most common form of fixed price contracts is purchase orders. However, it's important to note that with fixed price contracts, the seller assumes more risk. If there are any price increases, the seller is responsible for covering those increased costs and cannot charge the buyer a higher rate than the one originally agreed to pay. There are three common types of fixed price contracts: Firm fixed price (FFP), Fixed price incentive fee (FPIF), and Fixed Price with economic price adjustment (FP-EPA). FFP contracts are the most common type and are favored by many organizations because the price cannot be changed unless the scope of the expected work is changed. FPIF contracts offer more flexibility, allowing sellers to receive additional compensation for higher performance when certain metrics are met. However, there is still a cap, or price ceiling, with an FPIF contract. Any accrued costs that exceed this cap are the seller's responsibility.
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