PROPER USE OF FIRM FIXED PRICE (FFP) CONTRACTS

In these days of fiscal austerity, the default contract type is firm fixed price. But should it be? What do the regulations say about FFP? As we've said before, budget contraints do not rewrite the regulations. They remain the same as always. So what does FAR say about FFP? FAR 16.202-1 describes FFP and goes on in 16.202-2 to state the proper application of FFP. These shift-the-greatest-risk-to-the-contractor contracts are suitable when the government 1) can write "reasonably definite functional or detailed specifications"; and 2) when "the contracting officer can establish fair and reasonable prices at the outset."

Among the tests of whether fair and reasonable prices can be established at the outset is whether "the contractor is willing to accept a firm fixed price representing the assumption of the risks involved." Since FFP contracts place the maximum risk and full responsibility for all costs and resulting profit or loss on the contractor, you would think the admonition to discover whether the contractor is willing to accept the risks might have some meaning. When was the last time you were asked whether a FFP contract was the right choice? When have you been asked by your government buyer whether you were willing to accept the risk?

Obviously, you've never been asked. These are contracts of adhension where the government dictates the terms and conditions of the sale. There is no negotition (or is there?) over the type of contract. There could be. You could protest the wrong type of contract. But who is willing to do that? So the contract by adhension rule is inviolate? Probably. But that does not prevent us from pointing out that the use of fixed price contracts must be based on an analysis of the facts against the language of FAR 16.202-2. (We've discussed how to level the playing field during performance by reminding everyone in other blogs about the implied government obligations in every government contract.)

The latest problem with the drive to make all contracts fixed priced is the bait and switch tactic we've seen and also discussed in other blogs. The government cannot write a firm fixed price contract and then administer it as if it is time and materials, for example. Or, use some other excuse not to pay the firm fixed price. In such a case, the contractor clearly has a remedy for breach of contract, constructive change or constructive termination. So you may be stuck with the type of contract, but you should not be holding the bag when the government changes the rules of the game.