Fixed Price Contracts Guidance
To outline the administrative requirements for formulating, monitoring, and closing-out fixed-price agreements.
The University enters into fixed-price contract to conduct projects related to research, education, or public service mission of the University. The expectation is that fixed-price awards will have expenses that closely match the income received. Charges to fixed price accounts must reflect all actual effort and related costs incurred – without exception. Projects proposed and awarded to be completed under fixed price contracts are subject to the review and approval process outlined in the Office of Research Administration.
A fixed-price agreement (also known as firm-fixed price, firm-price, or fee-for-service contract) is an agreement where the contractor pays a firm price for the agreed-upon work, regardless of the ultimate cost to complete the project. The level of financial risk for the University is higher than that of a cost reimbursable contract because the University must complete all work, even if there are cost overruns. In addition, the University often does not receive payment until after milestones are met, or deliverables accepted. Therefore, either real or perceived problems with performance can prevent or delay payment to the University, even though expenditures have already been incurred. However, the University may also retain any un-expended balances that remain after contracted work is completed. Significant residual balances, however, call into question the integrity of the University’s costing practices, or its accounting for costs related to a project and therefore should be mitigated.
Residual funds are defined as an unobligated, unspent balance remaining in a sponsored account at the conclusion of the project. A residual fund occurs when the income or revenue is greater than the expense incurred to complete the project.
Federal Acquisition Regulation (FAR) defines it as “A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss, (FAR 16.202-1).”
Fixed-price agreements will typically have the following characteristics (not all characteristics have to be present in a fixed-price agreement):
- Are similar to purchase orders where a work product is delivered, (i.e., container of chemicals or a computer;)
- Are routine in nature;
- Have a well-defined statement of work;
- Are where the outcome is relatively certain;
- Have a failure rate of next to zero;
- Are where the University bears the risk that a routine project does not come within the “costs” and the University has to cover those costs;
- Normally short-term in nature (< 1 year); and
- Costs are normally
Fixed price contracts are best used when the principal investigator has reasonable prior experience with similar projects and can:
- Provide an accurate estimate of cost, and
- Define a tangible deliverable the sponsor is to
The Principal Investigator should work through the Office of Research Administration during the planning stages of contract development and negotiation to ensure the accuracy of the contract terms and conditions.
Developing Cost Estimates: Given the increased financial risk to the University inherent in fixed-price contracts, and the need to mitigate significant residual balances, developing cost estimates must be done with care. Using costing practices and standards from OMB 2 CFR 200, even with fixed price contracts, at the proposal stage will assist the University balance the need to limit financial risk and mitigate significant residual balances.
To comply with OMB 2 CFR 200 the University is required to review fixed price contracts that show significant deviation between proposed costs and actual expenditures. If estimates are consistently and significantly higher than actual costs, the University is required to examine cost estimation procedures to address the problem.
Standards provided by OMB 2 CFR 200 used in developing cost estimates are that costs:
- must be necessary and reasonable to carry out the proposed project;
- are only allocated in proportion of benefit received by the project;
- are not prohibited by the sponsor or regulations; and
- are treated consistently across all programs, fiscal years, and direct and indirect costs
Review and Approval of Proposals and Awards with Fixed Price Contracts: The proposal process for fixed-price contracts is still subject to the same internal reviews and approvals required for cost-reimbursable proposals and awards. The Principal Investigator begin the proposal process by submitting a Notice of Intent in PARS. The ORA Director and Associate Director are authorized on behalf of the University to approve proposals and negotiate contracts for sponsored activity, whether it is conducted under a grant or a contract. The principal investigator is not authorized to negotiate on behalf of the University.
Appropriate departmental, collegiate, and administrative reviews and approvals for conducting the project, regardless of any tentative understanding between the principal investigator and the sponsor must be obtained. These approvals are documented through the ORA PARS approval process. The principal investigator cannot begin any research until these approvals are obtained, and the contract is signed.
The following are vitally important in the formulation of the fixed price agreement and should be considered when preparing the fixed-price agreement.
- Sufficient funding for the project;
- Careful planning and timing of receipt of funds;
- Use of simple and clear wording in compensation clause; no room for interpretation; and
- Sufficient cash flow to keep the project on
- Not make promises the Principal Investigator can’t deliver;
- Refrain from guaranteeing certain results and use language such as “best efforts”;
- Avoid ambiguous language – be specific about the outcomes anticipated;
- Not agree to deadlines that the PI or the University Business offices cannot live up to; and
- Avoid agreeing to the submission of financial
- Do not typically require a submission of an itemized budget to the sponsor, however for internal monitoring an itemized budget is required; and
- Do carry F&A costs consistent with the University’s rate policy on F&A
As stated under the University’s Position Statement above, the expectation is that fixed-price awards will have expenses that closely match the income received, and charges to fixed price accounts must reflect all actual effort and related costs incurred – without exception. Give these expectations, the University must have the ability to track budgets and related expenses by each deliverable, milestone or task. This level of tracking allows the University to analyze budgets and expenses related to specific deliverables when significant residual balances occur. University offers the following tracking options:
- Separate Project Numbers (recommended option): Set-up separate Peoplesoft project numbers for each deliverable, milestone or task.
- Single Project Number with Class Codes: Set-up one Peoplesoft project number and track the budget and expenses by using unique class codes for each deliverable, milestone or task.
- Tracking in an Alternative System: The University recognizes that tracking budgets and expenses with numerous deliverables under a fixed-price award can be complicated, especially when certain expenses can be shared amongst several different deliverables. In these circumstances, the University will allow budgets and expenses for multiple deliverables to be combined under one Peoplesoft project number as long as the following conditions are met:
- The Departmental Administrative Unit must submit document outlining how the budgets and expenses for each deliverable will be tracked. This outline must be approved by the Director or Associate Director of ORA.
- The Departmental Administrative Unit must be able to produce an accounting (budget and related expenses) for any deliverable within two business days of the request.
It is the responsibility of the Principal Investigator and the Office of Research Administration to properly monitor the timing of tasks, deliverables, and final reporting of results. Most fixed-price agreements include a clause or special terms section regarding the submission and/or acceptance of a final report or product. This is usually tied to the final payment. If the terms are not met as provided by this section, then fixed-price or not, the institution has violated the agreement and total cost reimbursement may not be forth coming. If a liability is incurred for late submission or any violation of the contract terms then the Principal Investigator or the department will reimburse the appropriate account for the disallowance. Therefore, it is vitally important that all parties comply with the conditions set-forth in the fixed-price agreement
Sponsor Approvals of Budget Deviations: While standards for developing cost principles are applied by the University for both fixed-price and cost-reimbursable grants and contracts, budget approval requirements identified in the federal regulations OMB 2 CFR 200 will not apply to awards for fixed-price contracts. A fixed-price contract by definition is not subject to any adjustment on the basis of the University’s actual cost experience (FAR 16.202-1), and therefore, costs incurred are not subject to prior approvals by the Sponsor.
Once the University agrees to a fixed price award, it must produce the deliverables within the required time frame regardless of the actual cost of doing so. At project completion, the project account may approximate zero if costs were estimated accurately and the project went as planned, or may be positive if unanticipated efficiencies were realized.
To close out a fixed-price agreement all project activity must be completed. This includes:
- All applicable PI and co-PI salary was properly and fully charged to the award;
- The completion of all deliverables required under the fixed-price agreement;
- All costs in fulfilling the requirements of the award have been charged to the account;
- The receipt of full payment from the sponsor; and
- The F&A costs have been recovered at the University’s current federally negotiated rate to the extent funds are
After verification that all costs were accurately charged to the fixed price contract and all deliverables were accepted by the sponsor, both residual and deficit balances must be transferred to a non-restricted fund account. In cases where are a significant residual balance remains, the PI could be asked to provide an explanation for the deviation from estimated costs.
When a residual balance occurs on a fixed price award, the balance is transferred to an unrestricted fund according to the following Disbursement Schedule outlined below. Residual balances on fixed price awards should be used to further University research, educational or community service related activities.
Disbursement Schedule: Residual balances on fixed price awards will be disbursed according to the following schedule:
- Recovery of reduced or waived F&A: If a reduced or waived F&A rate was approved at the time of the proposal and if there is a residual balance, the University must be reimbursed the difference between the full and reduced F&A costs incurred prior to distribution of a residual balance to a residual fund (see Cost Sharing APL VIII-A). Any reduced or waived F&A costs will be transferred/or charged to the University indirect cost pool.
- Recovery of remaining applicable F&A: Remaining residual balances will incur facilities and administrative (F&A) costs at the University’s full applicable federal rate. The applicable F&A rate will be applied to the remaining residual balance and charged to the University indirect cost pool.
- Residual balances after recovery of applicable F&A will be disbursed as follows:
- 50% will be transferred to an unrestricted account for use by the Project Director/Principal Investigator (PD/PI)
- 25% will be transferred to an unrestricted account for use by the closing account administrative unit
- 25% will be transferred to an unrestricted account at the Office VPRDGS
Significant residual balances greater than $100k or 25% of the award total may call into question the budget estimation for the project or may indicate that some project costs are not being appropriately charged to the project accounts (usually meaning that the university is unintentionally subsidizing the work). Inflated prices can lead to charges of violation of cost and pricing regulations if federal funds are involved. Furthermore, excessive residuals may threaten the non-profit status of the institution and/or subject the institution to unrelated business income tax liability. Consequently, the Vice President for Research and Dean of the Graduate School or his or her designee must approve transfers of greater than $100k or 25% of the award total. Patterns of excessive residuals will be reviewed by ORA, and as necessary, referred to the appropriate academic officials for investigation, action, and/or exception to the standard disbursement schedule.