FAR sections 16.205 and 16.206

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

16.206-3
(c) Since this contract type provides the contractor no cost
control incentive except the ceiling price, the contracting
officer should make clear to the contractor during discussion
before award that the contractor’s management effectiveness
and ingenuity will be considered in retroactively redetermining the price.
16.206-3 Limitations.
This contract type shall not be used unless—
(a) The contract is for research and development and the
estimated cost is $100,000 or less;
(b) The contractor’s accounting system is adequate for
price redetermination;
(c) There is reasonable assurance that the price redetermination will take place promptly at the specified time; and
(d) The head of the contracting activity (or a higher-level
official, if required by agency procedures) approves its use in
writing.
16.206-4 Contract clause.
The contracting officer shall, when contracting by negotiation, insert the clause at 52.216-6, Price Redetermination—
Retroactive, in solicitations and contracts when a fixed-price
contract is contemplated and the conditions in 16.206-2 and
16.206-3(a) through (d) apply.

16.2-4

FEDERAL ACQUISITION REGULATION
16.207 Firm-fixed-price, level-of-effort term contracts.
16.207-1 Description.
A firm-fixed-price, level-of-effort term contract
requires—
(a) The contractor to provide a specified level of effort,
over a stated period of time, on work that can be stated only
in general terms; and
(b) The Government to pay the contractor a fixed dollar
amount.
16.207-2 Application.
A firm-fixed-price, level-of-effort term contract is suitable
for investigation or study in a specific research and development area. The product of the contract is usually a report
showing the results achieved through application of the
required level of effort. However, payment is based on the
effort expended rather than on the results achieved.
16.207-3 Limitations.
This contract type may be used only when—
(a) The work required cannot otherwise be clearly defined;
(b) The required level of effort is identified and agreed
upon in advance;
(c) There is reasonable assurance that the intended result
cannot be achieved by expending less than the stipulated
effort; and
(d) The contract price is $100,000 or less, unless approved
by the chief of the contracting office.