Which contract type shifts more cost risk to the contractor due to fixed price?

Which contract type shifts more cost risk to the contractor due to fixed price?

• A. Firm Fixed Price (FFP) Contract
• B. Cost-Plus-Incentive-Fee (CPIF) Contract
• C. Fixed Price Award Fee (FPAF) Contract
• D. Cost-Plus-Award-Fee (CPAF) Contract

Answer: (A)

Fixed-price contracts allocate cost risk to the party performing the work, because the price is set at award and does not adjust for actual costs. In a firm fixed price arrangement, the contractor must complete the work for the agreed price, so any cost overruns come out of the contractor’s profit and any savings go to the contractor. That’s why this type shifts the most cost risk to the contractor. Cost-plus options reimburse actual costs plus a fee or incentive, so the buyer bears more of the cost risk and the contractor’s exposure to overruns is reduced. Even fixed-price with performance incentives (award fees) keeps the base price fixed, but the potential extra reward doesn’t change the basic risk of overruns on the fixed-price portion. Cost-reimbursable contracts (cost-plus types) place even less cost risk on the contractor because costs are paid as incurred. So the contract most likely to shift the most cost risk to the contractor due to the fixed price is the firm fixed price arrangement.

Fixed-price contracts allocate cost risk to the party performing the work, because the price is set at award and does not adjust for actual costs. In a firm fixed price arrangement, the contractor must complete the work for the agreed price, so any cost overruns come out of the contractor’s profit and any savings go to the contractor. That’s why this type shifts the most cost risk to the contractor.

Cost-plus options reimburse actual costs plus a fee or incentive, so the buyer bears more of the cost risk and the contractor’s exposure to overruns is reduced. Even fixed-price with performance incentives (award fees) keeps the base price fixed, but the potential extra reward doesn’t change the basic risk of overruns on the fixed-price portion. Cost-reimbursable contracts (cost-plus types) place even less cost risk on the contractor because costs are paid as incurred.

So the contract most likely to shift the most cost risk to the contractor due to the fixed price is the firm fixed price arrangement.