Where does the greatest financial risk fall in a Firm-Fixed-Price (FFP) contract?

Where does the greatest financial risk fall in a Firm-Fixed-Price (FFP) contract?

• A. On the vendor
• B. On the government
• C. Equally shared between parties
• D. On the contract administrator

Answer: (A)

In a Firm-Fixed-Price contract, the price for defined work is set and does not change based on actual costs to the contractor. Because the seller agrees to complete the work for a fixed amount, any cost overruns reduce the contractor’s profit (or create a loss). That means the greatest financial risk sits with the contractor, who must absorb any inefficiencies, mistakes, or price inflation in the course of delivering the work. The government’s financial exposure is limited by the fixed price, though changes in scope can later adjust price through contract modifications. The contract administrator’s role is to oversee performance and compliance, not to bear financial risk.

In a Firm-Fixed-Price contract, the price for defined work is set and does not change based on actual costs to the contractor. Because the seller agrees to complete the work for a fixed amount, any cost overruns reduce the contractor’s profit (or create a loss). That means the greatest financial risk sits with the contractor, who must absorb any inefficiencies, mistakes, or price inflation in the course of delivering the work. The government’s financial exposure is limited by the fixed price, though changes in scope can later adjust price through contract modifications. The contract administrator’s role is to oversee performance and compliance, not to bear financial risk.