A Fixed-Price with Economic Price Adjustment (FPEPA) Contract is a fixed-price contract that includes a provision allowing for predefined adjustments to the price due to external economic conditions, such as inflation, currency fluctuations, or changes in material costs. This contract protects both buyers and sellers from unpredictable cost changes.
Key Aspects of FPEPA Contracts
- Fixed Base Price – The contract sets an initial agreed-upon amount.
- Adjustment Mechanism – Price adjustments are triggered by predefined conditions.
- Protects Against Inflation & Cost Fluctuations – Ensures fair compensation for economic changes.
- Common in Long-Term Contracts – Used when cost uncertainty is a major factor.
Triggers for Price Adjustments
| Adjustment Factor | Description |
|---|---|
| Inflation Rate Changes | Adjustments based on changes in the Consumer Price Index (CPI). |
| Raw Material Cost Variability | Price modifications for key commodities like steel, oil, or electronics. |
| Exchange Rate Fluctuations | Compensation for currency value shifts in international contracts. |
| Regulatory & Tax Adjustments | Price changes due to new government policies or tariffs. |
Example Scenarios
Construction Project
A contract for building materials includes a provision that adjusts costs annually based on steel price fluctuations.
Manufacturing Agreement
A supplier agreement for microchips allows price adjustments if semiconductor prices increase beyond 10%.
Government Defense Contract
A military aircraft contract adjusts pricing based on fuel cost index changes over a 5-year period.
Mermaid Diagram: FPEPA Contract Flow
graph LR; A["Buyer & Seller Sign Fixed-Price Contract"] --> B["Economic Adjustment Clause Included"] B --> C{"Economic Condition Change?"} C -->|Yes| D["Price Adjustment Applied"] C -->|No| E["Original Fixed Price Maintained"] D --> F["Revised Payment Issued"] E --> F
Why Fixed-Price with Economic Price Adjustment Contracts Matter
- Protects Buyers & Sellers from Market Volatility – Reduces financial uncertainty.
- Ensures Fair Pricing Over Time – Adjusts for inflation and commodity price shifts.
- Supports Long-Term Agreements – Encourages stability in multi-year contracts.
- Balances Risk & Flexibility – Prevents excessive losses due to unpredictable cost changes.
See also: Firm-Fixed-Price (FFP) Contract, Fixed-Price Incentive-Fee (FPIF) Contract, Procurement Management, Risk Management.