The contractor or seller under fixed price contracts must deliver the product or service for a per-negotiated fixed price. This contract type places the maximum risk and the full responsibility for all costs squarely on the seller. The ability of the seller to make a profit depends on the seller’s ability to control project costs and risks.
When quoting Firm Fixed Price, the seller must consider the costs and potential risks for the entire project lifecycle because the seller will not be able to adjust the price due to unforeseen circumstances.
Cost Reimbursement contracts on the other hand, provide for payment of allowable costs to the extent agreed to in the contract. The buyer agrees to pay the project costs and an incentive fee of some sort to the seller. The seller’s cost responsibility is minimized under cost reimbursement contracts and the buyer assumes greater control over cost management.
There are a number of flavors of Fixed Price. Here are a few:
- Firm-Fixed-Price (FFP): Contract price is the price bid.
- Firm-Fixed-Price with Level-of-Effort Term: The seller is required to devote a specified level of effort over a stated period of time for a fixed dollar amount.
- Firm-Fixed-Price with Materials Reimbursement: Used in purchase of repair and overhaul services to provide a firm fixed-price for services with reimbursement for cost of materials used.
- Firm-Fixed-Price with Materials Reimbursement: Used in purchase of repair and overhaul services to provide a firm fixed-price for services with reimbursement for cost of materials used.
- Fixed-Price Contract with Economic Price Adjustment: Appropriate to protect both the buyer and the seller when there is serious doubt about the stability of labor or material prices during the life of the contract.
- Fixed-Price with Incentive: A fixed-price incentive contract is a fixed-price type contract with provisions for adjustment of profit.
There are also several types of Cost Reimbursements:
- Cost Reimbursement: Cost-reimbursement type of contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract.
- Cost-Plus-A-Fixed-Fee (CPFF): Sellers cost responsibility is minimized and the buyer’s cost responsibility is maximized.