Firm Fixed Price (FFP) Contracts

FFP contracts establish a fixed price that remains constant regardless of actual contractor costs.

Basic Structure:

• Contract specifies deliverables and fixed price


• Contractor delivers work per specifications


• Government pays agreed price upon acceptance


• Contractor keeps any cost savings as profit


• Contractor absorbs any cost overruns as loss

Payment Types:

• Lump Sum: Single payment upon delivery/completion


• Milestone Payments: Payments tied to deliverable milestones


• Progress Payments: Periodic payments based on percentage complete (with government approval)

FFP Variations:

• FFP: Standard firm fixed price, no adjustments


• FFP with Economic Price Adjustment (FFP-EPA): Price can adjust for specified economic conditions (material costs, labor rates)


• Fixed Price Incentive (FPI): Price adjusts based on cost/schedule performance against targets

Risk Allocation:
The defining characteristic of FFP is risk allocation:

• Contractor bears 100% of cost risk


• Government accepts 0% of cost risk


• This clear division drives contract type selection

Accurate pricing is critical to FFP success. Underpricing leads to losses; overpricing means losing competitions.

Cost Estimation Process:

Analyze requirements - Understand every deliverable and specification

Develop work breakdown structure - Break work into estimable tasks

Estimate direct costs - Labor hours, materials, travel, subcontracts

Apply indirect rates - Overhead, G&A, fringe benefits

Add profit/fee - Appropriate margin for risk and investment

Apply contingency - Reserve for identified risks

Key Cost Elements:

• Direct Labor: Hours by labor category at appropriate rates


• Materials: All supplies, equipment, and materials needed


• Subcontracts: Work to be performed by others


• Travel: Required travel based on contract performance


• Other Direct Costs: Permits, licenses, equipment rentals


• Indirect Costs: Overhead, G&A applied per your rate structure


• Profit: Margin appropriate for risk level (typically 8-15%)

Pricing Strategies:

• Cost-Based: Build price from detailed cost estimates


• Market-Based: Price based on competitive market rates


• Hybrid: Combine cost analysis with market intelligence

Common Pricing Mistakes:

• Underestimating labor hours for complex tasks


• Forgetting indirect cost application


• Ignoring travel and incidental costs


• Insufficient contingency for unknowns


• Unrealistic subcontractor pricing

Because FFP contracts place all cost risk on the contractor, proactive risk management is essential.

Before Contract Award:

• Understand scope completely: Ambiguous requirements create cost risk


• Identify assumptions: Document what you're assuming about conditions


• Assess technical risk: New technologies or approaches carry more risk


• Evaluate team capability: Can your team execute as planned?


• Price appropriately: Include realistic contingency

During Performance:

• Track costs against budget: Catch overruns early


• Manage scope: Ensure government doesn't expand requirements


• Document changes: Everything outside original scope is a potential modification


• Control schedule: Delays often increase costs


• Communicate issues: Don't hide problems - address them

Managing Scope Creep:
Scope creep is the primary risk on FFP contracts:

• Define boundaries clearly: Know exactly what's included and excluded


• Document change requests: Every addition or modification in writing


• Price changes promptly: Don't perform out-of-scope work for free


• Escalate disagreements: Involve contracting officer if needed

When Things Go Wrong:

• Assess impact: Understand full cost and schedule impact


• Notify customer: Communicate professionally and promptly


• Propose solutions: Don't just present problems


• Negotiate equitable adjustment: If government-caused, seek relief


• Document everything: Records are essential for claims or disputes

FFP contracts often emphasize price in evaluation, but technical capability still matters.

Evaluation Approaches:

• Lowest Price Technically Acceptable (LPTA): Price wins among acceptable proposals


• Best Value Tradeoff: Technical factors may outweigh price differences


• Price as a Significant Factor: Price heavily weighted but not determinative

Proposal Strategy by Evaluation Type:

For LPTA:

• Focus on meeting minimum requirements


• Don't over-propose capabilities


• Price as competitively as possible while maintaining profitability


• Ensure compliance with all requirements to be "acceptable"

For Best Value:

• Emphasize discriminating technical strengths


• Demonstrate superior past performance


• Price realistically - significant underpricing can raise concerns


• Show value that justifies any price premium

Price Proposal Elements:

• Detailed cost breakdown by CLIN or deliverable


• Labor hours and rates by category


• Material and subcontract costs


• Indirect cost application


• Profit/fee calculation


• Assumptions and exclusions

Demonstrating Price Realism:
Even on FFP, government may evaluate price realism:

• Can you actually perform for your proposed price?


• Are key assumptions reasonable?


• Is pricing consistent with technical approach?


• Does pricing suggest understanding of requirements?