Frequently Asked Questions

What is the risk associated with fixed price contracts for the seller?

Fixed price contracts, including Firm Fixed Price (FFP), Fixed Price Incentive Fee (FPIF), and Fixed Price with Economic Price Adjustment (FP-EPA), carry a significant amount of risk for the seller. The primary risk is that the seller is responsible for any cost increases that occur during the project. This means that if the cost of labor, materials, or other project-related expenses rise, the seller cannot pass these additional costs onto the buyer. Instead, the seller must absorb these costs, which can impact profitability. In an FFP contract, the seller is responsible for any cost increases unless the scope of work changes. This means that if the seller underestimates the cost of the project, they will have to cover the difference. Similarly, in an FPIF contract, while there is an opportunity for the seller to earn additional compensation for high performance, there is a cap on this. Any costs that exceed this cap are the seller's responsibility.