Firm Fixed Price Definition

A firm fixed price (FFP) is a type of pricing arrangement in which the seller agrees to provide goods or services at a pre-agreed price, regardless of any cost overruns that may occur. This type of pricing is typically used when the buyer and seller have a good understanding of the work to be performed and the risks involved.

Under a firm fixed price contract, the buyer assumes all responsibility for any cost overruns. This means that if the project ends up being more expensive than originally planned, the buyer will have to cover the difference. On the other hand, if the project comes in under budget, the seller gets to keep any savings.

One advantage of this type of contract is that it allows buyers to better control their costs. Since sellers are not able to pass on unexpected expenses, buyers can be sure that they will not have to pay more than they originally budgeted for. Additionally, this type of contract often results in lower prices since sellers are motivated to keep costs down in order to maximize their profits.

A disadvantage of firm fixed price contracts is that they can create tension between buyers and sellers. If cost overruns do occur, sellers may feel like they are being unfairly penalized while buyers may feel like they are overpaying. Additionally, this type of contract can lead to poor quality work as sellers may cut corners in order to save money.

Overall, firm fixed price contracts can be a good option for buyers