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Fixed Price Contracts: What Government Contractors Need to Know
Many anticipate that the new administration will favor fixed-price government contracts and grants. The preference for this type of contract has changed over time; in 2017, the Department of Defense (DoD) favored fixed-price contracts but reversed this position in 2022.
Fixed-price contracts may appear beneficial for taxpayers, but they can pose a significant risk for government contractors. While the federal government often prefers them for their budget and funding predictability, these contracts shift all performance risk onto the contractor. Typically, contractors cannot receive a price increase, even if the contract requirements change. This situation can severely affect small businesses that may not be able to absorb large losses.
However, contractors have a few options for managing the risks associated with fixed-price contracts.
- A contractor can try to include a clause that allows for equitable price adjustments (EPA) if unforeseen circumstances arise. For instance, an EPA clause could be triggered if costs exceed a threshold.
- Contractors should aim to negotiate statements of work (SOWs) and Performance Work Statements (PWS) that define reasonable and achievable performance goals. For research and development contracts, it is better to negotiate milestones and goals that don’t guarantee success.
- A contractor might negotiate a dollar cap on the amount it is required to spend to complete the contract.
Although contracting officers may resist these requests, these strategies enable more companies, including small businesses, to compete for contracts. By using alternative proposals, companies can reduce the risks of fixed-price contracting.
Fixed-price contracts, government contracts, risk mitigation, equitable price adjustments, contract negotiation, statements of work, SOW, performance work statements, PWS