Fixed Price Contracts

Posted on April 16, 2009 by

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Project managers increasingly need to be knowledgeable about procurement and contracts. Contract Types is a tool of the fourth edition PMBOK®’s Plan Procurements process. There are a variety of contract types falling under the general categories of Fixed Price, Cost Reimbursable, and Time and Materials. The types of Fixed Price contracts (as termed in the PMBOK®) are Firm Fixed Price (FFP), Fixed Price Incentive Fee (FPIF), and Fixed Price with Economic Price Adjustment (FP-EPA). Fixed Price contracts are generally preferred by project managers. Below are examples of each type of Fixed Price contract.

Firm Fixed Price (FFP). The price is set and cannot be changed unless the scope of work changes. For example, Katy has agreed to bake ten dozen cookies for her neighbor for the price of $40.

Fixed Price Incentive Fee (FPIF). The price is set, but there is the potential for the seller to also receive a financial incentive if an agreed-upon, objective metric is met. Katy has agreed to bake ten dozen cookies for her neighbor for $40, and if she is able to finish baking by 2:00pm this afternoon, the neighbor will pay her an additional $10.

Fixed Price with Economic Price Adjustment (FP-EPA). The price is set, but especially for contracts over long periods of time, it may be adjusted due to changing economic conditions. Katy has agreed to bake ten dozen cookies every year for her neighbor’s annual office party. This year she will receive $40, and every year afterwards she will receive 3% more than the year before to account for inflation.