The government buys many (or most) things using Firm Fixed Price (FFP) contracts. This contract type is a great option when the government clearly knows what it wants and the contractor knows how to deliver it (see episodes 320 and 473 about building those requirements). FFP is also the ideal option for buying commercial products and services (see episode 386 about using Commercial acquisition procedures).
But what if some part of a FFP contract is more volatile? What if FFP would be a great fit for a contract – except for that one item that has a much more volatile price. In that case, the contractor may not be willing, or able, to absorb the risk of performing the entire contract at a fixed price because that one variable drives so much cost – therefore, the risk that the contractor will lose money is too high.
Enter: the Firm Fixed Price contract with Economic Price Adjustment (the FFP EPA). This contract type allows for the government to adjust the price of one (or a few) particular elements that may drive cost throughout contract performance. The adjustment serves as a guardrail to keep that the one cost from overshadowing the cost of the entire contract.
In this episode, we dig into FAR 16.203 to outline the why, how and what behind the use FFP EPA.