A fixed-price contract is a type of contract such that the payment amount does not depend on resources used or time expended by the contractor. This is opposed to a cost-plus contract, which is intended to cover the costs incurred by the contractor plus an additional amount for profit. Such a scheme is often used by military and government contractors to require vendors to incur the risk of cost overruns, and to control costs. However, historically when such contracts are used for innovative new projects with untested or undeveloped technologies (such as new military transports or stealth attack airplanes), it often results in failure if costs greatly exceed the ability of the contractor to absorb unexpected cost overruns.[opinion]
Fixed prices can require more time, in advance, for sellers to determine the price of each item. However, the fixed-price items can each be purchased faster, but bargaining could set the price for an entire set of items being purchased, reducing the time for bulk purchases. Also, fixed-price items can help in pre-determining the value of an inventory, such as for insurance estimates.
Such contracts continue to be popular despite a history of failed or troubled projects, although they tend to work when costs are well known in advance. Some laws mandate a preference for fixed-price contracts, however, many people maintain that such contracts are actually the most expensive, especially when the risks or costs are unknown in advance.[1]
Fixed-price contract with award fees (FAR 16.404).[2]
Economic price adjustment may take account of increases or decreases from an established and agreed-upon price level, actual costs or a price index.[3]
Examples
A400M
Airbus's German chief executive Tom Enders indicated that the fixed-price contract for the A400M transport aircraft was a disaster based on naivety, excessive enthusiasm and arrogance, stating, "If you had offered it to an American defence contractor like Northrop, they would have run a mile from it". He stated that unless the contract was renegotiated, the project must be abandoned.[4]
A-12 Avenger II
The U.S. A-12 Avenger II aircraft development contract was a fixed-price incentive contract, not a fixed-price contract, with a target price of $4.38 billion and ceiling price of $4.84 billion. It was for a unique, stealthy, flying wing design. On 7 January 1991, the Secretary of Defense canceled the program. It was the largest contract termination in United States Department of Defense history. Rather than saving costs, the new type of aircraft was projected to consume 70 percent of the U.S. Navy's aircraft budget within three years.[5]
KC-46 Pegasus
The U.S. Boeing KC-46 Pegasus contract was a fixed price contract. Due to its history of cost overruns, it is an example of how fixed price contracts place the risk upon the vendor, in this case Boeing. Total cost overruns for this aircraft have totaled about $1.9 billion.[6] However, Boeing was able to absorb those costs and has gained US Air Force approval to begin producing the KC-46.[7]
Construction
The Canadian Construction Documents Committee's "Stipulated Price Contract" (CCDC-2), revised in February 2008, provides for a property owner and prime contractor to agree that work is done for a fixed price or lump sum.[8]
References
^Weigelt, M. (2009), Fixed-price contracts required by stimulus law 2021-12-04 at the Wayback Machine, 17 February 2009
^Federal Acquisition Regulation, Part 16 - Types of Contract 2019-12-14 at the Wayback Machine, accessed 14 December 2019
^Federal Acquisition Regulation, 16.203-1 Description 2019-12-14 at the Wayback Machine, accessed 14 December 2019
^"Heavy going". The Economist. 2009-04-08. ISSN 0013-0613. Retrieved 2021-05-26.
^A-12 Avenger II Advanced Tactical Aircraft (ATA) - 1983-1991
^"Boeing Racks Up Another $393M In Cost Overruns On KC-46 Program". 21 July 2016. Retrieved 2016-08-15.
^"Air Force approves first round of KC-46 tanker production". Retrieved 2016-08-15.
^Pawson, O., "Stipulated Price Contract", Canadian Consulting Engineer, accessed 14 December 2019
Further reading
Allan, B. (2004). Project management. 1st ed. London: Facet.
February 01, 2023
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A fixed price contract is a type of contract such that the payment amount does not depend on resources used or time expended by the contractor This is opposed to a cost plus contract which is intended to cover the costs incurred by the contractor plus an additional amount for profit Such a scheme is often used by military and government contractors to require vendors to incur the risk of cost overruns and to control costs However historically when such contracts are used for innovative new projects with untested or undeveloped technologies such as new military transports or stealth attack airplanes it often results in failure if costs greatly exceed the ability of the contractor to absorb unexpected cost overruns opinion Fixed prices can require more time in advance for sellers to determine the price of each item However the fixed price items can each be purchased faster but bargaining could set the price for an entire set of items being purchased reducing the time for bulk purchases Also fixed price items can help in pre determining the value of an inventory such as for insurance estimates Such contracts continue to be popular despite a history of failed or troubled projects although they tend to work when costs are well known in advance Some laws mandate a preference for fixed price contracts however many people maintain that such contracts are actually the most expensive especially when the risks or costs are unknown in advance 1 Contents 1 Contract types 2 Examples 2 1 A400M 2 2 A 12 Avenger II 2 3 KC 46 Pegasus 2 4 Construction 3 References 4 Further readingContract types EditThe United States Federal Acquisition Regulation FAR provides for the following types of contract with a fixed price element Firm fixed price contract FAR 16 202 Fixed price contract with economic price adjustment FAR 16 203 Fixed price contract with prospective price redetermination FAR 16 205 Fixed ceiling price contract with retroactive price redetermination FAR 16 206 Firm fixed price level of effort term contract FAR 16 207 Fixed price incentive contract FAR 16 403 Fixed price incentive firm target contract FAR 16 403 1 Fixed price incentive successive targets contract FAR 16 403 2 Fixed price contract with award fees FAR 16 404 2 Economic price adjustment may take account of increases or decreases from an established and agreed upon price level actual costs or a price index 3 Examples EditA400M Edit Airbus s German chief executive Tom Enders indicated that the fixed price contract for the A400M transport aircraft was a disaster based on naivety excessive enthusiasm and arrogance stating If you had offered it to an American defence contractor like Northrop they would have run a mile from it He stated that unless the contract was renegotiated the project must be abandoned 4 A 12 Avenger II Edit The U S A 12 Avenger II aircraft development contract was a fixed price incentive contract not a fixed price contract with a target price of 4 38 billion and ceiling price of 4 84 billion It was for a unique stealthy flying wing design On 7 January 1991 the Secretary of Defense canceled the program It was the largest contract termination in United States Department of Defense history Rather than saving costs the new type of aircraft was projected to consume 70 percent of the U S Navy s aircraft budget within three years 5 KC 46 Pegasus Edit The U S Boeing KC 46 Pegasus contract was a fixed price contract Due to its history of cost overruns it is an example of how fixed price contracts place the risk upon the vendor in this case Boeing Total cost overruns for this aircraft have totaled about 1 9 billion 6 However Boeing was able to absorb those costs and has gained US Air Force approval to begin producing the KC 46 7 Construction Edit The Canadian Construction Documents Committee s Stipulated Price Contract CCDC 2 revised in February 2008 provides for a property owner and prime contractor to agree that work is done for a fixed price or lump sum 8 References Edit Weigelt M 2009 Fixed price contracts required by stimulus law Archived 2021 12 04 at the Wayback Machine 17 February 2009 Federal Acquisition Regulation Part 16 Types of Contract Archived 2019 12 14 at the Wayback Machine accessed 14 December 2019 Federal Acquisition Regulation 16 203 1 Description Archived 2019 12 14 at the Wayback Machine accessed 14 December 2019 Heavy going The Economist 2009 04 08 ISSN 0013 0613 Retrieved 2021 05 26 A 12 Avenger II Advanced Tactical Aircraft ATA 1983 1991 Boeing Racks Up Another 393M In Cost Overruns On KC 46 Program 21 July 2016 Retrieved 2016 08 15 Air Force approves first round of KC 46 tanker production Retrieved 2016 08 15 Pawson O Stipulated Price Contract Canadian Consulting Engineer accessed 14 December 2019Further reading EditAllan B 2004 Project management 1st ed London Facet Retrieved from https en wikipedia org w index php title Fixed price contract amp oldid 1135158302, wikipedia, wiki, book, books, library,
