What defines a “Firm-Fixed-Price Contract” according to FAR regulations?

A firm-fixed-price contract is characterized by a price that remains constant and is not subject to adjustment, irrespective of the costs incurred by the contractor. This means that the contractor is obligated to perform the work for the price agreed upon at contract signing, regardless of any fluctuations in their costs for materials, labor, or overhead that might occur during the performance of the contract. As a result, the contractor takes on the full risk of cost overruns, making it crucial for them to accurately estimate their expenses before entering into the agreement.

This arrangement offers certainty in budgeting for the government agency as it provides a clear expectation of what the final cost will be, allowing for effective financial planning. In turn, it incentivizes contractors to control costs and complete the project efficiently.

Other options, such as contracts with flexible pricing based on performance metrics or those that permit price renegotiations at defined intervals, do not align with the fixed nature of a firm-fixed-price contract. Additionally, while bearing the risk of cost changes is a characteristic of firm-fixed-price contracts, the definition primarily centers on the unchanging price commitment rather than the risk element alone. However, option A captures the essence of the contract structure effectively by highlighting the fixed price aspect.