A firm fixed price contract lays out a set fee to be paid to a contractor for completing a specific job. This fixed price cannot be changed under any circumstances, which can pose a potential risk to the contractor if a project is not managed well. According to FAR Subpart 16.2, a firm fixed price contract includes a set fee that cannot be changed.

In a firm fixed price (FFP) contract, the scope of work is well-defined and does not change, and the contract price is fixed. Once the contract is signed, the seller must complete the project in accordance with the specifications of the fixed cost and set duration.

Pursuant to DFARS 216.403-1 and DFARS PGI 216.403-1, contracting officers are encouraged to evaluate an increased use of the Fixed Price Incentive Firm Target (FPIF) contract type. The FPIF contract type offers contractors a significant incentive to control costs. However, the FPIF is one of the more complex contract types to negotiate and execute.

These types of contracts are often used in construction projects or contracts with the U.S. government because they are straightforward with one bottom line, thus avoiding potential cost overruns. While fixed price development contracts come with higher risks for contractors, they can be an efficient and lucrative way to handle project agreements.