FAR section 16.203

SUBPART 16.2—FIXED-PRICE CONTRACTS

Subpart 16.2—Fixed-Price Contracts

16.203-2
16.203 Fixed-price contracts with economic price
adjustment.

16.201 General.
Fixed-price types of contracts provide for a firm price or,
in appropriate cases, an adjustable price. Fixed-price contracts
providing for an adjustable price may include a ceiling price,
a target price (including target cost), or both. Unless otherwise
specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the
contract price under stated circumstances. The contracting
officer shall use firm-fixed-price or fixed-price with economic price adjustment contracts when acquiring commercial
items.
16.202 Firm-fixed-price contracts.
16.202-1 Description.
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. It provides maximum incentive for the contractor to control costs and perform
effectively and imposes a minimum administrative burden
upon the contracting parties. The contracting officer may use
a firm-fixed-price contract in conjunction with an award-fee
incentive (see 16.404) and performance or delivery incentives
(see 16.402-2 and 16.402-3) when the award fee or incentive
is based solely on factors other than cost. The contract type
remains firm-fixed-price when used with these incentives.
16.202-2 Application.
A firm-fixed-price contract is suitable for acquiring commercial items (see Parts 2 and 12) or for acquiring other supplies or services on the basis of reasonably definite functional
or detailed specifications (see Part 11) when the contracting
officer can establish fair and reasonable prices at the outset,
such as when—
(a) There is adequate price competition;
(b) There are reasonable price comparisons with prior purchases of the same or similar supplies or services made on a
competitive basis or supported by valid cost or pricing data;

16.203-1 Description.
(a) A fixed-price contract with economic price adjustment
provides for upward and downward revision of the stated contract price upon the occurrence of specified contingencies.
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.
(2) Adjustments based on actual costs of labor or material. These price adjustments are based on increases or
decreases in specified costs of labor or material that the contractor actually experiences during contract performance.
(3) Adjustments based on cost indexes of labor or material. These price adjustments are based on increases or
decreases in labor or material cost standards or indexes that
are specifically identified in the contract.
(b) The contracting officer may use a fixed-price contract
with economic price adjustment in conjunction with an
award-fee incentive (see 16.404) and performance or delivery
incentives (see 16.402-2 and 16.402-3) when the award fee or
incentive is based solely on factors other than cost. The contract type remains fixed-price with economic price adjustment
when used with these incentives.
16.203-2 Application.
A fixed-price contract with economic price adjustment
may be used when (i) there is serious doubt concerning the
stability of market or labor conditions that will exist during an
extended period of contract performance, and
(ii) contingencies that would otherwise be included in the
contract price can be identified and covered separately in the
contract. Price adjustments based on established prices should
normally be restricted to industry-wide contingencies. Price
adjustments based on labor and material costs should be limited to contingencies beyond the contractor’s control. For use
of economic price adjustment in sealed bid contracts, see
14.408-4.

(c) Available cost or pricing information permits realistic
estimates of the probable costs of performance; or

(a) In establishing the base level from which adjustment
will be made, the contracting officer shall ensure that contingency allowances are not duplicated by inclusion in both the
base price and the adjustment requested by the contractor
under economic price adjustment clause.

(d) Performance uncertainties can be identified and reasonable estimates of their cost impact can be made, and the contractor is willing to accept a firm fixed price representing
assumption of the risks involved.

(b) In contracts that do not require submission of cost or
pricing data, the contracting officer shall obtain adequate
information to establish the base level from which adjustment
will be made and may require verification of data submitted.
16.2-1

16.203-3
16.203-3 Limitations.
A fixed-price contract with economic price adjustment
shall not be used unless the contracting officer determines that
it is necessary either to protect the contractor and the Government against significant fluctuations in labor or material costs
or to provide for contract price adjustment in the event of
changes in the contractor’s established prices.
16.203-4 Contract clauses.
(a) Adjustment based on established prices—standard
supplies. (1) The contracting officer shall, when contracting
by negotiation, insert the clause at 52.216-2, Economic Price
Adjustment—Standard Supplies, or an agency-prescribed
clause as authorized in paragraph (a)(2) of this subsection, in
solicitations and contracts when all of the following conditions apply:
(i) A fixed-price contract is contemplated.
(ii) The requirement is for standard supplies that
have an established catalog or market price.
(iii) The contracting officer has made the determination specified in 16.203-3.
(2) If all the conditions in paragraph (a)(1) of this subsection apply and the contracting officer determines that the
use of the clause at 52.216-2 is inappropriate, the contracting
officer may use an agency-prescribed clause instead of the
clause at 52.216-2.
(3) If the negotiated unit price reflects a net price after
applying a trade discount from a catalog or list price, the contracting officer shall document in the contract file both the catalog or list price and the discount. (This does not apply to
prompt payment or cash discounts.)
(b) Adjustment based on established prices—semistandard
supplies. (1) The contracting officer shall, when contracting
by negotiation, insert the clause at 52.216-3, Economic Price
Adjustment—Semistandard Supplies, or an agency-prescribed clause as authorized in paragraph (b)(2) of this section, in solicitations and contracts when all of the following
conditions apply:
(i) A fixed-price contract is contemplated.
(ii) The requirement is for semistandard supplies for
which the prices can be reasonably related to the prices of
nearly equivalent standard supplies that have an established
catalog or market price.
(iii) The contracting officer has made the determination specified in 16.203-3.
(2) If all conditions in paragraph (b)(1) of this subsection apply and the contracting officer determines that the use
of the clause at 52.216-3 is inappropriate, the contracting
officer may use an agency-prescribed clause instead of the
clause at 52.216-3.
(3) If the negotiated unit price reflects a net price after
applying a trade discount from a catalog or list price, the contracting officer shall document in the contract file both the cat16.2-2

FEDERAL ACQUISITION REGULATION
alog or list price and the discount. (This does not apply to
prompt payment or cash discounts.)
(4) Before entering into the contract, the contracting
officer and contractor must agree in writing on the identity of
the standard supplies and the corresponding contract line
items to which the clause applies.
(5) If the supplies are standard, except for preservation,
packaging, and packing requirements, the clause prescribed in
16.203-4(a) shall be used rather than this clause.
(c) Adjustments based on actual cost of labor or material.
(1) The contracting officer shall, when contracting by negotiation, insert a clause that is substantially the same as the clause
at 52.216-4, Economic Price Adjustment —Labor and Material, or an agency-prescribed clause as authorized in
subparagraph (c)(2) of this section, in solicitations and contracts when all of the following conditions apply:
(i) A fixed-price contract is contemplated.
(ii) There is no major element of design engineering
or development work involved.
(iii) One or more identifiable labor or material cost
factors are subject to change.
(iv) The contracting officer has made the determination specified in 16.203-3.
(2) If all conditions in paragraph (c)(1) of this section
apply and the contracting officer determines that the use of the
clause at 52.216-4 is inappropriate, the contracting officer
may use an agency-prescribed clause instead of the clause at
52.216-4.
(3) The contracting officer shall describe in detail in the
contract Schedule—
(i) The types of labor and materials subject to adjustment under the clause;
(ii) The labor rates, including fringe benefits (if any)
and unit prices of materials that may be increased or
decreased; and
(iii) The quantities of the specified labor and materials allocable to each unit to be delivered under the contract.
(4) In negotiating adjustments under the clause, the contracting officer shall—
(i) Consider work in process and materials on hand
at the time of changes in labor rates, including fringe benefits
(if any) or material prices;
(ii) Not include in adjustments any indirect cost
(except fringe benefits as defined in 31.205-6(m)) or profit;
and
(iii) Consider only those fringe benefits specified in
the contract Schedule.
(d) Adjustments based on cost indexes of labor or material.
The contracting officer should consider using an economic
price adjustment clause based on cost indexes of labor or
material under the circumstances and subject to approval as
described in paragraphs (d)(1) and (d)(2) of this section.

SUBPART 16.2—FIXED-PRICE CONTRACTS
(1) A clause providing adjustment based on cost
indexes of labor or materials may be appropriate when—
(i) The contract involves an extended period of performance with significant costs to be incurred beyond 1 year
after performance begins;
(ii) The contract amount subject to adjustment is substantial; and
(iii) The economic variables for labor and materials
are too unstable to permit a reasonable division of risk
between the Government and the contractor, without this type
of clause.
(2) Any clause using this method shall be prepared and
approved under agency procedures. Because of the variations
in circumstances and clause wording that may arise, no standard clause is prescribed.
16.204 Fixed-price incentive contracts.
A fixed-price incentive contract is a fixed-price contract
that provides for adjusting profit and establishing the final
contract price by a formula based on the relationship of final
negotiated total cost to total target cost. Fixed-price incentive
contracts are covered in Subpart 16.4, Incentive Contracts.
See 16.403 for more complete descriptions, application, and
limitations for these contracts. Prescribed clauses are found at
16.406.

16.206-2
ment or other revision of the contract price under stated
circumstances.
16.205-3 Limitations.
This contract type shall not be used unless—
(a) Negotiations have established that—
(1) The conditions for use of a firm-fixed-price contract
are not present (see 16.202-2); and
(2) A fixed-price incentive contract would not be more
appropriate;
(b) The contractor’s accounting system is adequate for
price redetermination;
(c) The prospective pricing periods can be made to conform with operation of the contractor’s accounting system;
and
(d) There is reasonable assurance that price redetermination actions will take place promptly at the specified times.
16.205-4 Contract clause.
The contracting officer shall, when contracting by negotiation, insert the clause at 52.216-5, Price Redetermination—
Prospective, in solicitations and contracts when a fixed-price
contract is contemplated and the conditions specified in
16.205-2 and 16.205-3(a) through (d) apply.

16.205 Fixed-price contracts with prospective price
redetermination.

16.206 Fixed-ceiling-price contracts with retroactive
price redetermination.

16.205-1 Description.
A fixed-price contract with prospective price redetermination provides for—
(a) A firm fixed price for an initial period of contract deliveries or performance; and
(b) Prospective redetermination, at a stated time or times
during performance, of the price for subsequent periods of
performance.

16.206-1 Description.
A fixed-ceiling-price contract with retroactive price redetermination provides for—
(a) A fixed ceiling price; and
(b) Retroactive price redetermination within the ceiling
after completion of the contract.

16.205-2 Application.
A fixed-price contract with prospective price redetermination may be used in acquisitions of quantity production or services for which it is possible to negotiate a fair and reasonable
firm fixed price for an initial period, but not for subsequent
periods of contract performance.
(a) The initial period should be the longest period for which
it is possible to negotiate a fair and reasonable firm fixed price.
Each subsequent pricing period should be at least 12 months.
(b) The contract may provide for a ceiling price based on
evaluation of the uncertainties involved in performance and
their possible cost impact. This ceiling price should provide
for assumption of a reasonable proportion of the risk by the
contractor and, once established, may be adjusted only by
operation of contract clauses providing for equitable adjust-

16.206-2 Application.
A fixed-ceiling-price contract with retroactive price redetermination is appropriate for research and development contracts estimated at $100,000 or less when it is established at
the outset that a fair and reasonable firm fixed price cannot be
negotiated and that the amount involved and short performance period make the use of any other fixed-price contract
type impracticable.
(a) A ceiling price shall be negotiated for the contract at a
level that reflects a reasonable sharing of risk by the contractor. The established ceiling price may be adjusted only if
required by the operation of contract clauses providing for
equitable adjustment or other revision of the contract price
under stated circumstances.
(b) The contract should be awarded only after negotiation
of a billing price that is as fair and reasonable as the circumstances permit.
16.2-3