Fixed Price Contracts (CONCEPT 34)

Fixed Price Contracts (CONCEPT 34)

Fixed Price Contracts

This is our 34th post in our Project Management Professional (PMP)® Concepts Learning Series

Each post within this series will present a comparison of common concepts that appear on the PMP and Certified Associate in Project Management (CAPM)® exams.

Fixed Price Contracts

Fixed price contracts involve a fixed total price for the product and may also include incentives for meeting or exceeding selected project objectives. The simplest form of a fixed price contract is a purchase order.

Fixed price contracts place more risk on the seller, as if there is any type of price increase, the seller would be responsible for the increased costs and cannot pass them on to the buyer.

There are three common types of fixed price contracts: firm fixed price (FFP), fixed price incentive fee (FPIF), and fixed price with economic price adjustment (FP-EPA)

Firm Fixed Price (FFP)

The FFP is the most commonly used contract type and is favored by most organizations because the price is set and is not subject to change unless the scope of work changes. Any cost increases due to adverse performance would be the responsibility of the seller.

Fixed Price Incentive Fee (FPIF)

A FPIF contract gives the buyer and seller some flexibility in that it allows for deviation from performance, with a financial incentive for achieving certain metrics. Generally the incentives are related to cost, schedule, or the technical performance of the seller. A price ceiling is set and any costs above that ceiling are the responsibility of the seller.

Fixed Price with Economic Price Adjustment (FP–EPA)

FP-EPA contracts are used for long-term contracts and they allow for pre-defined adjustments to the contract price due to changed conditions. This could include inflation changes or increased or decreased costs for specific commodities. The contract is intended to protect both the buyer and seller from external conditions over which they have no control.

Examples

You purchase 10 books from the publisher for $19.99 each. The PO is a firm fixed-price contract.

You hire an instructor to come onsite and deliver a PMP exam prep course using a fixed-price incentive fee contract. The contract states that the instructor will receive $2,000 to facilitate the course. In addition, the company will pay the instructor an extra $500 for each student that successfully completes their PMP exam.

You are in a long-term contract with a trucking company using a fixed-price with economic price adjustment contract. The contract states that the trucking company will be paid $1,000 per week. If the price of fuel increases or decreases by more than 10%, the weekly pay will increase or decrease by 5% accordingly.

See all posts in our PMP Concepts Learning Series

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