Fixed Price Incentive (Fpi) Definition

In business, a fixed price incentive (FPI) is a type of pricing arrangement in which the buyer and seller agree on a fixed price for a product or service, but the seller also receives additional payments if they meet certain performance goals. Typically, these goals are based on factors such as quality, quantity, timing, and customer satisfaction.

The fixed price incentive can be used in a variety of situations, such as when a company is outsourcing work to another firm. In this case, the buyer may want to incentivize the seller to ensure that the work is done well and meets all deadlines. The FPI can also be used in government contracting. For example, the U.S. Department of Defense often uses FPIs in its contracts with defense contractors.

There are advantages and disadvantages to using an FPI arrangement. Some advantages include that it can help ensure that quality standards are met and that work is completed on time. Additionally, it can provide more certainty for both buyers and sellers regarding costs. On the other hand, one disadvantage is that the buyer may end up paying more than they would under another pricing arrangement if the seller exceeds the performance goals. Another potential drawback is that it can be difficult to set realistic performance goals that accurately reflect the desired outcome of the project.