A Firm-Fixed-Price (FFP) Contract is a type of fixed-price contract where the buyer pays the seller a set amount as defined in the contract, regardless of the seller’s actual costs. This contract places the financial risk on the seller, incentivizing cost efficiency.
Key Aspects of Firm-Fixed-Price Contracts
- Price Is Set in Advance – The agreed-upon price does not change, even if costs fluctuate.
- Minimal Buyer Risk – The seller absorbs any cost overruns.
- Requires Clear Scope Definition – Works best when deliverables and expectations are well-defined.
- Common in Government & Large Contracts – Frequently used in public sector projects and manufacturing.
FFP vs. Other Contract Types
| Contract Type | Description | Risk to Buyer | Risk to Seller |
|---|---|---|---|
| Firm-Fixed-Price (FFP) | Fixed total price, regardless of actual costs. | Low | High |
| Cost-Plus-Fixed-Fee (CPFF) | Buyer reimburses costs plus a fixed profit. | Moderate | Low |
| Cost-Plus-Incentive-Fee (CPIF) | Buyer reimburses costs, with incentives for performance. | Moderate | Moderate |
| Time & Materials (T&M) | Buyer pays for time and resources used. | High | Low |
Example Scenarios
Software Development
A government agency contracts a software company to build a web application for $1 million, with no cost adjustments allowed.
Construction Project
A contractor agrees to construct a bridge for a fixed cost of $5 million, covering materials, labor, and overhead.
Product Manufacturing
A company orders 10,000 custom parts from a supplier at a fixed unit price, ensuring stable procurement costs.
Mermaid Diagram: FFP Contract Flow
graph LR; A["Buyer Defines Project Scope"] --> B["Fixed Price Agreement Signed"] B --> C["Seller Executes Work"] C --> D["Costs Incurred by Seller"] D -->|Fixed Payment| E["Buyer Pays Agreed Amount"]
Why Firm-Fixed-Price Contracts Matter
- Reduces Cost Uncertainty for Buyers – Ensures budget stability.
- Encourages Seller Efficiency – Sellers must manage costs effectively.
- Prevents Scope Creep – Requires well-defined project requirements.
- Common in Competitive Bidding – Often used in vendor selection processes.
See also: Cost-Plus-Fixed-Fee (CPFF), Cost-Plus-Incentive-Fee (CPIF), Time & Materials (T&M) Contract, Procurement Management.