Firm-Fixed-Price (FFP)
A contract type that locks in a single price regardless of cost overruns, placing performance risk on the contractor. See when FFP is used under FAR Part 16.
What Is Firm-Fixed-Price?
A Firm-Fixed-Price contract, commonly abbreviated FFP, is a federal contract type in which the price is established at award and is not adjusted based on the contractor's actual costs during performance. The contractor delivers the contracted work for the agreed price and absorbs any cost overruns; conversely, the contractor keeps any cost savings as profit.
FFP is one of the contract types defined under FAR Subpart 16.2, and it is the preferred contract type for most federal acquisitions when the requirement is well defined, the risk of cost variation is manageable, and the contractor can reasonably forecast cost. FFP contrasts with cost-reimbursement contracts (such as cost-plus-fixed-fee) where the agency pays actual cost plus a defined fee.
Key Characteristics
FFP contracts have several defining attributes. The price is fixed at award and does not adjust for the contractor's actual cost performance.
The contractor bears full cost overrun risk and captures full benefit from cost savings. Scope is tightly defined in the Statement of Work, and any scope changes require a change order and bilateral modification for equitable adjustment.
Profit is built into the fixed price rather than determined by actual cost performance, requiring contractors to estimate cost accurately during proposal preparation. FFP contracts can be paired with economic price adjustment clauses for inflation, or with award-fee provisions, but the base structure remains fixed.
Indirect rates applied to direct cost during proposal pricing must be defensible, since the resulting price is what the contractor will receive regardless of actual indirect rate movement during performance.
How It Works in Government Contracting
FFP contracts operate at three points in the federal contracting lifecycle. First, during proposal preparation, the contractor estimates direct cost (labor by labor category, materials, subcontractor costs, other direct costs), applies indirect rates and a profit factor, and submits a single total price.
The contracting officer's price analyst evaluates the price against the Independent Government Cost Estimate and market data. Second, during performance, the contractor delivers the defined work for the agreed price, tracking actual costs through job cost codes to monitor profitability and identify scope creep.
Third, at change events, any agency-directed change generates a change order with separate equitable adjustment, but absent change orders, the price remains fixed.
Real-World Example
A federal construction contractor wins a $20 million FFP contract to build a federal warehouse. The contractor's bid breakdown estimated $15 million direct cost (materials, labor, subcontractors), $3 million indirect cost (overhead, G&A), and $2 million profit.
During performance, supply chain disruptions push materials cost up by $400,000 and a key subcontractor's costs are $200,000 higher than estimated. The contractor absorbs the full $600,000 cost overrun, reducing profit from $2 million to $1.4 million.
Had the contractor used a cost-reimbursement contract, the agency would have absorbed the overrun. The disciplined cost tracking in dedicated job cost codes is what let the contractor identify the overrun early and adjust execution to limit further impact.
Regulatory Framework
FFP contracts are governed by FAR Subpart 16.2, particularly FAR 16.202 (Firm-Fixed-Price Contracts) and FAR 16.203 (Fixed-Price Contracts with Economic Price Adjustment). The Changes clause for FFP contracts is FAR 52.243-1, which authorizes equitable adjustment for contracting officer-directed changes.
The DFARS adds DoD-specific provisions for FFP contracts above certain thresholds, including Truth-in-Negotiations Act (TINA) certification at $2 million or more in cost or pricing data. FFP contracts under the simplified acquisition threshold follow streamlined FAR Part 13 procedures. Past performance evaluations under FFP focus heavily on whether the contractor delivered within scope and on time.
Why It Matters for Contractors
FFP discipline directly drives contractor margin and federal market reputation. Underestimated cost translates directly to lost profit, with no agency recovery path.
Conversely, disciplined estimation, tight scope management, and operational execution preserve margin and signal capability to future evaluators. FFP contracts are typically preferred by agencies for routine, well-defined requirements, so contractors who avoid FFP exposure miss large portions of the federal market.
Strategic contractors build robust price-to-win analysis, maintain historical cost data by CLIN and labor category, and run rolling profitability forecasts on active FFP work. Our piece on the ROI of an AI proposal platform covers how proposal automation reduces FFP estimation risk. Inadequate cost discipline is the most common reason FFP contractors underperform on margin.
Common Misconceptions
FFP contracts cannot be modified after award.
They can. The Changes clause allows the contracting officer to direct changes within scope, with equitable adjustment for cost and schedule impact. The base price is fixed but is adjusted upward or downward for change orders.
FFP is always cheaper for the government than cost-reimbursement.
Not necessarily. Contractors price risk into the FFP bid, and on uncertain requirements the risk premium can exceed actual cost variation. The right contract type depends on requirement clarity.
FFP eliminates the need for cost tracking.
It does not. Contractors must track actual cost to monitor profitability, support change order pricing, and prepare proposal pricing for follow-on work. Skipping cost tracking on FFP work is one of the most common margin-erosion patterns.
Frequently Asked Questions
When does the government prefer FFP over other contract types?
FAR 16.103 directs contracting officers to use the contract type that gives the contractor reasonable incentive for cost control while protecting the government's interests. FFP is preferred when the requirement is well defined, the risk of cost variation is manageable, and the contractor can reasonably estimate cost. For high-uncertainty or research-and-development work, cost-reimbursement or hybrid types are often chosen.
What is the difference between FFP and Fixed-Price Incentive (FPI)?
FFP locks in a single price with no adjustment for cost variation. Fixed-Price Incentive contracts establish a target cost, target profit, and ceiling price, with adjustment based on actual cost performance. FPI shares risk between the contractor and government within defined bounds; FFP places all risk on the contractor.
How does TINA (Truth in Negotiations Act) apply to FFP contracts?
For non-commercial FFP contracts above $2 million, contractors must submit certified cost or pricing data and certify the data is accurate, current, and complete. Defective pricing claims can result in price reductions and False Claims Act exposure. Our compliance automation guide covers how teams prepare TINA-certified pricing.
Can FFP contracts have award fees or performance incentives?
A pure FFP contract has no award fee, but hybrid structures like Fixed-Price Award Fee (FPAF) layer a performance-based fee on top of the fixed price. The base structure is fixed; the award fee provides additional incentive. FAR 16.404 governs FPAF.
What happens if a contractor cannot complete the work within the fixed price?
The contractor must still deliver the contracted work or face termination for default. Absorbing the cost overrun is part of the FFP risk profile. In some cases, the contractor can negotiate a contract modification, but the burden of justifying additional cost is on the contractor.
Related Government Contracting Topics
FAR (Federal Acquisition Regulation): FAR Subpart 16.2 governs Firm-Fixed-Price contracts.
Cost-Plus-Fixed-Fee (CPFF): Cost-reimbursement contract type that contrasts with FFP; agency pays actual cost plus a defined fee.
Cost-Plus-Incentive-Fee (CPIF): Cost-reimbursement contract with shared cost-savings incentive; intermediate between FFP and CPFF.
Time and Materials (T&M): Hybrid contract type using fixed labor rates with materials at cost; less common than FFP.
Statement of Work (SOW): The document defining the scope of work; precision in the SOW is critical to FFP success.
Change Order: Mechanism for adjusting FFP price for agency-directed scope changes.
Bilateral Modification: Modification format used to formalize change order pricing on FFP contracts.
Indirect Rates: Rates applied to direct cost during FFP proposal pricing; risk of indirect rate movement is borne by the contractor.
Job Cost Code (JCC): Cost tracking infrastructure used to monitor FFP profitability during performance.
Independent Government Cost Estimate (IGCE): Agency benchmark used during FFP price evaluation.
Labor Category: Job classification used in FFP labor pricing.
How LotusPetal AI Helps
LotusPetal AI's capture and proposal automation platform builds FFP price proposals from real cost history, applies current indirect rates from your forward pricing rate agreements, and runs win-probability analysis at multiple price points. Proposal teams produce defensible FFP pricing in hours instead of days.