What are the three types of contracts?

The Three Main Types of Fixed-Price Contracts Explained

When it comes to procurement and project management, contracts set the foundation for expectations, responsibilities, and financial terms. Among the most widely used are fixed-price contracts—agreements where the price is set in advance and doesn’t change based on the seller’s costs. These contracts are popular because they offer predictability and limit financial risk for the buyer.

The most straightforward type is the Firm Fixed-Price (FFP) contract. Once the price is agreed upon, it remains unchanged regardless of how the project unfolds. This puts the full burden of cost control on the seller, making FFP ideal when project requirements are well-defined and unlikely to change.

A step up in flexibility is the Fixed-Price Incentive Fee (FPIF) contract. Here, both buyer and seller share in the financial outcome. If the seller finishes under budget or ahead of schedule, they can earn an additional fee. But if costs run over, the penalty is shared—up to a predetermined ceiling. This type encourages efficiency and collaboration, aligning both parties’ interests.

The third type, Fixed-Price with Economic Price Adjustment (FP-EPA), is designed for long-term contracts where inflation or market fluctuations could impact costs. It allows for pre-defined adjustments based on economic indices like material costs or labor rates. This protects the seller from unforeseen market shifts while ensuring fair pricing for the buyer.

Choosing the right contract type depends on the project’s complexity, duration, and level of risk both parties are willing to accept. While FFP offers certainty, FPIF fosters performance, and FP-EPA provides adaptability—each serving a distinct purpose in contract management.