HKSM
Firm Fixed Price Contract (FFP)
A fixed-price agreement where the buyer pays a set amount stated in the contract, and that price does not change based on the seller's actual costs.
Key Points
- Price is established up front and stays firm unless the scope is formally changed.
- The seller carries most cost and performance risk; overruns are not billed to the buyer.
- Best for well-defined, stable requirements where outcomes are clear.
- Payments are often tied to milestones or deliverables, giving the buyer cost certainty.
Example
A company hires a contractor to renovate a lobby for a fixed total of $200,000 based on finalized drawings and specifications. Even if materials or labor cost more than expected, the contractor must complete the work for $200,000 unless the buyer approves a scope change.
PMP Example Question
A vendor reports higher-than-expected labor hours but cannot increase the invoice unless a change request is approved. Which contract type is most likely in place?
- Firm Fixed Price (FFP)
- Time and Material (T&M)
- Cost Plus Fixed Fee (CPFF)
- Cost Plus Incentive Fee (CPIF)
Correct Answer: A — Firm Fixed Price contract (fixed total price regardless of seller costs)
Explanation: In an FFP, the agreed price does not change due to the seller's actual costs; the seller absorbs overruns unless scope is formally changed.
