Firm Fixed Price (FFP) Contract

A contract type that establishes a set price that does not change regardless of actual cost, placing all cost risk on the contractor.

A Firm Fixed Price (FFP) contract is the most straightforward and most commonly used contract type in federal contracting. The government pays the agreed price, and the contractor absorbs any cost overruns. If actual performance costs less than estimated, the contractor keeps the difference as additional profit. If actual costs exceed the estimate, the contractor absorbs the loss.

When FFP Is Used

FAR 16.202 states that FFP contracts are appropriate when the risk of performance is minimal or can be reasonably estimated. They are preferred for commercial items, commodity purchases, construction projects with well-defined plans and specifications, and any services where the scope is well understood and stable. The FAR requires contracting officers to use the contract type that places an appropriate degree of risk on the contractor while providing the contractor an incentive to control costs.

Advantages for the Government

FFP contracts are administratively simple, require no cost accounting oversight, and give the government budget certainty. The government knows exactly what it will pay regardless of what the contractor spends.

Advantages and Risks for Contractors

FFP gives contractors the opportunity to improve their margins through efficiency and innovation. A contractor that can perform the work at 80% of the estimated cost earns a 20-point margin improvement. However, scope creep, underestimated requirements, unforeseen technical challenges, and labor shortages can quickly turn a profitable FFP contract into a loss. Accurate cost estimation before proposal submission is essential.

FFP vs. Other Contract Types

Time-and-Materials (T&M) contracts pay fixed hourly rates plus materials, with no limit on hours unless a ceiling is specified. Cost-Reimbursement contracts reimburse actual costs plus a fee, shifting financial risk to the government. FFP transfers maximum risk to the contractor and is appropriate only when requirements are well defined enough that a contractor can price them accurately.