Firm Fixed-Price (FFP)
A Firm Fixed-Price (FFP) contract sets a fixed total price for a defined product or service, and the price does not change regardless of the seller's actual costs.
Explanation
FFP is the simplest and most common type of fixed-price contract. The buyer and seller agree on a price, and that price remains constant unless the scope of work changes through a formal contract modification. The seller has maximum incentive to control costs because any savings go directly to the seller's profit, while any overruns reduce the seller's profit.
FFP contracts carry the lowest cost risk for the buyer because the total price is known upfront and will not increase. For the seller, FFP carries the highest cost risk of any contract type. Sellers typically include a risk contingency in their FFP price to account for potential cost overruns.
FFP is most appropriate when the scope is completely and clearly defined, the requirements are stable, and the seller has sufficient experience to accurately estimate costs. It is not suitable for research and development work or projects where the scope is evolving.
Key Points
- •Price remains fixed regardless of seller's actual costs
- •Lowest cost risk for the buyer; highest cost risk for the seller
- •Requires well-defined, stable scope for success
- •Most common and simplest contract type
Exam Tip
FFP = maximum cost risk on the seller, minimum cost risk on the buyer. The exam loves asking which contract type has the most/least risk for each party. FFP is always the answer for lowest buyer risk.
Frequently Asked Questions
Related Topics
Fixed-Price Contracts
Fixed-price contracts are a category of agreements where the seller is paid a set price for delivering a defined product or service, regardless of the seller's actual costs.
Fixed-Price Incentive Fee (FPIF)
A Fixed-Price Incentive Fee (FPIF) contract sets a target cost, target profit, ceiling price, and a share ratio that adjusts the seller's fee based on actual performance against the target cost.
Cost-Reimbursable Contracts
Cost-reimbursable contracts are agreements where the buyer reimburses the seller for all legitimate actual costs incurred in performing the work, plus a fee representing the seller's profit.
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Part of
Procurement Management
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