What is FFP (Firm-Fixed-Price)?
Firm-Fixed-Price (FFP) is a type of contract commonly used in government and commercial procurement. Under an FFP contract, the buyer agrees to pay the seller a fixed amount for the delivery of specific goods or services, regardless of the actual costs incurred by the seller. This contract type is advantageous for both parties when the scope of work is well-defined and the costs can be accurately estimated in advance.
Key Characteristics of FFP Contracts
Fixed Price Agreement
The primary feature of an FFP contract is the fixed price, which means that the seller is obligated to deliver the agreed-upon goods or services at the specified price. This price does not change even if the seller experiences cost overruns or savings during the execution of the contract.
Risk Allocation
In an FFP contract, the seller assumes the majority of the financial risk. If the actual costs exceed the agreed-upon price, the seller absorbs the additional expenses. Conversely, if the costs are lower than expected, the seller benefits from the savings.
Clear Scope of Work
FFP contracts are most effective when the scope of work is clearly defined and understood by both parties. This clarity reduces the risk of misunderstandings and disputes, ensuring that both the buyer and seller have aligned expectations.
Incentives for Efficiency
Since the seller bears the risk of cost overruns, there is a strong incentive to manage the project efficiently and control costs. This can lead to innovative approaches and cost-saving measures that benefit both parties.
Limited Flexibility
One potential drawback of FFP contracts is their limited flexibility. Changes to the scope of work or unforeseen circumstances can be challenging to accommodate without renegotiating the contract terms, which can lead to delays or additional costs.
