Fixed Price Contracts: The Benefits of Performance Reimbursement Contracts in Procurement

Fixed price contract agreements (also called performance reimbursement contracts) are one of the major contract types in government procurement.

According to Federal Acquisition Regulations (FAR), performance reimbursement contracts require an agency to pay the previously agreed upon compensation no matter what expenses the contractor incurred. So, a buyer pays a fixed, previously negotiated price, with no additional expenses.

In specific cases such contracts may also involve adjustable price, and include a ceiling and a target price an agency would be required to pay after the project is completed.

In general, performance reimbursement contracts are more focused on the results and project objectives than on methods of performance. They define the appropriate degree of performance flexibility. Besides, since the contract requires an agency to pay the contractor a specific and previously agreed price, the agency faces fewer risks, including market-price risks.

In addition, an agency has an opportunity to hedge risks during the initial stages of procurement by means of effective planning and clear outlining of project goals and deadlines. Market price risk can be hedged by means of a performance reimbursement (fixed price) contract.

Unlike cost plus contracts, performance reimbursement contracts not only lower the project cost, but also provide an agency with:

  • Definite and predictable project outcomes and timelines
  • Means of price and timing controls
  • Central planning

Fixed Price Contracts in US Procurement

Performance reimbursement contracts are widely used in US procurement mainly because they provide more certainty regarding the final project cost, and, as a result, potentially minimize it.

This approach is used to ensure only the best contractors are rewarded.

The New York City Department of Health, for example, supports fixed-price contracts because they keep the cost down while allow an appropriate level of service from contractors. In addition, such an approach improves hospitals’ measurement and internal controls techniques. Consequently, since the methods of internal controls and measurement improve, the hospital care, general performance and accountability are to become of higher quality as well.

Long Term Fixed Price Contracts

Though it may be thought that performance reimbursement contracts are used mostly for relatively short term contracts, this assumption can be undermined by the fact that in 2007 the Mayor of the City of New York was planning to release an RFP for a long term fixed price contract to provide the city with solar power systems for Roosevelt Island Tidal Energy project.

On Dec. 20, 2007 New York City Corps of Engineers awarded a $8,686,680.00 fixed-price contract for reconstruction of the Mologne Cadet Health Clinic in West Point, New York. The project is expected to be completed by Jan. 6, 2010, according to the U.S. Department of Defense.

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