Fixed price contracts may incorporate financial incentives to stimulate the seller in achieving or exceeding certain targets, such as scheduled delivery dates, cost and technical performance, etc. These things can be quantified and measured. They can be used to motivate the seller to deliver early or to reach performance or quality standards. Award fees are based on a broad set of subjective criteria. (Fee implies profits.)
Firm fixed price (FFP) contra…ct: Fixed price contracts are favored when the scope of the project is clearly defined and is not subject to change. The seller is required to finish the work regardless of the final price. Most buyers prefer a firm fixed price contract because they know the price upfront. The buyer and the seller agree on a price for the work. The price remains the same unless there is a scope change. All risk for cost increase is with the seller. However, this isn’t always the best choice, particularly if the project scope is still evolving or subject to change.
Fixed price incentive fee (FPIF) contract: A type of contract where the buyer pays the seller a set amount (as defined by the contract), and the seller can earn an additional amount provided some pre-defined performance criteria is achieved.
FPIF contract is good for both the buyer and the seller. To the seller, it is beneficial because the seller gets an agreed base fee and also has the chance of further rewards for exceptional performance.
Advantage to the buyer – the buyer pays an agreed base fee up front, and the price ceiling is fixed by defining how much it can go up based on seller’s performance.
Fixed price with economic price adjustment (FP-EPA) contract: Used when the seller’s performance period is spread over a considerable number of years. It is a fixed price contract with a provision allowing for predefined final adjustments to the contract price to account for conditions such as cost increases. The EPA clause must relate to a reliable financial index that is used to adjust the final price.