A Firm Fixed Price contract sets a single, all-inclusive price the contractor will receive for delivering the contracted scope of work. Cost overruns are absorbed by the contractor; cost underruns are retained by the contractor. The contract type pushes maximum cost risk onto the vendor in exchange for the simplest possible administration: no progress billing of indirect rates, no DCAA cost audits, no incurred cost submissions. FFP is the federal government's preferred contract type for commercial items and well-defined services.
FFP is most appropriate when the scope is precisely defined, the technical risk is low, and historical pricing data is available. Construction contracts, commercial item purchases, and well-scoped IT modernization tasks commonly use FFP. The contract type is poorly suited to research and development, ambiguous scopes, or work where the government cannot fully specify the requirement — in those cases, cost-reimbursement or T&M structures shift risk back to the government in exchange for less rigid performance requirements.
For small contractors, winning FFP work is profitable when cost controls are tight and the scope is genuinely understood. The danger is bidding FFP on work where the requirement is poorly defined — the contractor is on the hook for any scope creep, and government program offices are notoriously good at adding small requests that consume real labor hours. Disciplined estimating, clear assumptions documented in the proposal, and a willingness to walk away from FFP solicitations with under-specified scopes separate profitable FFP firms from chronic loss-makers.