What is a fixed-price contract with economic price adjustment?

The fixed price with economic price adjustment contract (FP-EPA) is a type of contract wherein the buyer pays the reseller a fixed price that has already been decided on and is stipulated in the contract. This particular contract allows pre-defined adjustment to the price or rate of the contract.

Can you modify a fixed-price contract?

It is reprinted here with permission. Firm fixed-price contracts seem like a simple concept in practice — agreements that do not allow for the modification of the contract price after award without an express agreement between the parties.

What are the three types of fixed price contracts?

There are three main types of fixed-price contracts:

• Firm fixed-price.
• Fixed-price incentive fee.
• Fixed-price with economic price adjustment.

What are the benefits of a fixed-price contract?

The benefits of fixed-price contracts are that they come with a pricing guarantee. So long as the project doesn’t go beyond the defined scope of tasks and responsibilities, the price won’t change. These contracts typically provide a well-defined process complete with specific phases and deadlines.

What is a fixed price contract example?

Fixed-Price Plus Incentive Fee Contract (FPIF) An example of FPIF is a contract for the total project cost: 1,100,000 USD. If the project is finished one month early, an additional 10,000 USD is paid to the seller, incentivizing the seller to work faster.

Who has the cost risk in a fixed price contract?

As shown in Exhibit 1, fixed-price contracts are the highest risk to the supplier and the lowest risk to the client (Gray and Larson, 2014, p. 453). Cost-based contracts, on the other hand, are the highest risk to the client and lowest risk to the supplier.

What are the risks of a fixed-price contract?

With a fixed-price contract, the seller takes on the risk of executing the contract for a set price, even if their costs increase. With a cost-plus contract, vendors charge for the costs they incur and an additional amount to cover managing the project and allowing for profit.

Who bears the greatest risk in a fixed-price contract?

What is the most commonly used fixed-price contract?

A FFP is the most common type of fixed-price contract.

What is a fixed-price contract example?

What are some challenges with fixed-price contracts?

The three most common reasons for a change to a fixed-price contract are:

• The initial requirements did not contain sufficient detail or clarity.
• Requirements change due to new information about the needs of the project (better ideas occur as work progresses)

How does economic price adjustment work?

Economic price adjustments are of three general types: (1) Adjustments based on established prices. These price adjustments are based on increases or decreases from an agreed-upon level in published or otherwise established prices of specific items or the contract end items.

When should a fixed-price contract be used?

A fixed-price contract sets the terms of a project and establishes the price of goods or services. It outlines exactly what the seller is required to do and the seller’s obligations for a firm price. Fixed-price contracts are especially useful when a project’s scope is easily determined from the beginning.

What are the general characteristics of fixed-price contracts?

A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss.

What are the advantages & disadvantages of fixed price contracts?

Weighing the advantages and disadvantages of a fixed-price contract helps a small business decide whether to exercise the option.

• Advantage: Certainty of Costs.
• Disadvantage: Certainty Comes at a Higher Cost.
• Advantage (or Disadvantage): Market Changes.
• Advantage: Budgeting and Ability to Pay.

When should you use a firm fixed price contract?

What are some challenges with fixed price contracts?

What are the advantages and disadvantages of fixed-price contract?

The buyer is at a disadvantage and the seller is at an advantage when the price of a good or service drops suddenly. Even though a fixed-price contract may cost a buyer more money up front, the buyer can budget for the contract’s expenditures and ensure that it has adequate funds to meet its obligations.

Who has the cost risk in a fixed-price contract?

When should you use a firm fixed-price contract?

What are the risks of a fixed price contract?

What does a fixed price contract really cost?

The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract. This contract type permits contracting for efforts that might otherwise present too great a risk to contractors, but it provides the contractor only a minimum incentive to control costs.

How to negotiate fixed price contracts?

DON’T low-ball: Clients can smell that something is wrong if your bid is significantly lower that other Vendors’.

What does fixed price type contract mean?

Firm-fixed-price contract (FAR 16.202)

How is the producer price index used for Contract Adjustment?

The term “Producer Price Index” refers to a family of indexes compiled by the Bureau of Labor Statistics. Each index to be used should be cited specifically in the contract by referring to “the Producer Price Index for…” followed by the exact title and any identifying code number.