Firm-fixed price contracts are those contracts that provide for a price which normally is not subject to any adjustment. However, prices are subjected to changes if they are explicitly included in the agreement. The changes include contract change, economic pricing, or defective pricing.
Firm fixed price contracts are negotiated usually where reasonably definite specifications are available, and costs can be estimated with reasonable accuracy. A fixed price contract places minimum administrative burden on contracting parties, but subjects a contractor to maximum risk arising from full responsibility for all cost escalations. Firm fixed price contracts are also called firm price contracts.
A firm-fixed-price contract is generally used when the risk involved is minimal, or can be predicted with a high degree of certainty. A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of a contractor's cost experience in performing the contract. This type of contract places upon a contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides a contractor maximum incentive to control costs and perform effectively and imposes minimum administrative burden upon contracting parties. A contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive and performance or delivery incentives when an award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.[ Washington v. Chao, 577 F. Supp. 2d 27, 33 (D.D.C. 2008)]