A firm fixed price contract, or FFP, is a type of contract used in government contracting and commercial projects. It is a contract in which the buyer agrees to pay the seller a fixed price for the goods or services delivered, regardless of the actual costs incurred by the seller. This type of contract is used when the buyer can accurately define the scope of work and the seller can accurately estimate the cost of the work.
FFP contracts are advantageous for both buyers and sellers. For buyers, a FFP contract provides certainty in pricing, which can help with budgeting and financial planning. For sellers, a FFP contract provides certainty in payment, which can help with cash flow management.
However, FFP contracts also carry risks for both buyers and sellers. For buyers, a FFP contract can lead to higher costs if the scope of work is not accurately defined or if changes are made to the scope of work during the project. For sellers, a FFP contract can lead to lower profits if actual costs exceed the estimated costs.
To mitigate these risks, FFP contracts often include provisions for change orders, which allow for revisions to the scope of work or the price if necessary. FFP contracts may also include incentives for early completion or penalties for late completion.
In summary, a firm fixed price contract is a type of contract used in government contracting and commercial projects where the buyer agrees to pay the seller a fixed price for the goods or services delivered. While FFP contracts provide certainty in pricing and payment, they also carry risks for both buyers and sellers. To mitigate these risks, FFP contracts often include provisions for change orders and incentives or penalties for timely completion.