Federal Government: Firm on Firm-Priced Government Contracting

By: Margaret M. Cassidy & Jelena Tasic

On April 30, 2026, President Trump issued an executive order Promoting Efficiency, Accountability, and Performance in Federal Contracting directing federal agencies to use “best business practices to protect taxpayer dollars, hold contractors accountable, and achieve demonstrable returns on investment.”

How?  By using firm-fixed price contracts that define outcomes and deliverables with “predictable timelines” for completion.

To execute on this, agencies must adopt the following practices:

• Justify use of non-fixed price contracts in writing;
• Obtain senior-level approval for larger awards that are not firm-fixed price, for DoD this means contracts over $100M;
• Report exceptions regularly to the Office of Management and Budget; and
• Review their ten highest value contracts for possible modification to fixed-price structures;
• Use firm-fixed price contracts as defined in FAR Part 16 or contracts that tether profit to performance metrics;
• Update the FAR to implement the requirements of the EO (the FAR revolution continues).

Why? According to the EO, fixed price contracts will position the federal government to generally avoid making price adjustments based on costs and will incentivize contractors to control cost, and efficiently perform to maximize their profits. EO posits that using firm-fixed price or incentive based contracts will parallel contracting in the commercial world.

Any exceptions? The EO does not completely eliminate contract types that are not firm fixed price. It provides some exceptions to the order to use firm fixed price:

• Research and development contracts. By definition, R&D contracts explore the unknown to bring forward the possible. Given this, its is difficult to define what success looks like, how much it will cost to deliver, and how much time it will take. Thus, flexibility is needed. (FAR Part 35, Research and Development Contracting)
• Pre-production development phase of major system acquisitions. This makes sense because the agency may know what it needs in a major systems but, may not know specifically how to develop the system. (FAR Part 34, Major System Acquisition). Like R&D contracts, in the pre-production phase there are still unknowns that are being worked out. Major systems are defined as systems combining together hardware, software, platforms to fulfill a mission need at an agency. (FAR 2.1(defining major systems).
• Emergency or disaster contracting. It goes without saying why firm fixed price may not fit with these types of contracts.

Risks for Federal Government

Though accountability and predictability certainly are positive factors, firm fixed price contracts carry potential risks for federal agencies.

1. Statements of work must be precise, and even precise statements leave little room for flexibility post-award.Drafting such precise statements will be particularly challenging for technology contracts and complex defense systems where requirements evolve through performance.
2. Mods become the primary mechanism for scope adjustment, increasing administrative burden on contracting officers and giving contractors leverage to interpret scope narrowly and price every change.
3. Contractors will embed substantial risk premiums in their pricing, raising the all-in cost to the government.
4. In industries where cost-reimbursement and labor-hour contracts are the commercial norm, firm fixed price may deter commercial firms from pursuing federal work altogether.
5. Small businesses and new federal government entrants often lack the financial reserves to absorb cost overruns, narrowing the contractor base precisely for the complex procurements where competition matters most.
6. As requirements evolve during performance, agencies should expect a higher volume of disputes over scope.
7. Firm fixed price rewards cost efficiency, which is not synonymous with technological advancement. Without a mechanism to price in capital investment or research and development, contractors have little incentive to invest beyond what the contract requires.
8. Where rigidity prevents necessary mid-course corrections, the government may fail to achieve the outcomes the procurement was originally intended to deliver.

The federal government believes the pros outweigh the potential cons in these instances.

Opportunities for Government Contractors

For contractors with the right capabilities, firm fixed price contracts present real upside.

1. Clearly defined scopes allow contractors to manage costs and margins with confidence at the outset.
2. Contractors that deliver efficiently keep the gains and cost reductions translate directly to profit.
3. Firms with disciplined cost controls and mature performance management are well-positioned to built around measurable outcomes.
4. Contractors offering standardized services are particularly well-suited to firm fixed price work.
5. Successful performance becomes a measurable record that strengthens positioning for future competitions.

Risks for Government Contractors

The upside comes with meaningful exposure, particularly for firms without the scale or pricing discipline to absorb it.

1. When performing a firm fixed price contract, reducing costs means more profit, but overruns become losses—the contractor bears almost all cost risk.
2. Firm fixed price proposals require sophisticated pricing models and tightly drafted statements of work, raising pre-award costs without any guarantee of recovery.
3. Adjustments become difficult and the modification process can slow execution and impede efficient delivery.
4. Where statements of work prove ambiguous, contractors face heightened risk of formal disputes.
5. Where subs perform complex work or operate in industries that default to cost-reimbursement, they may decline firm fixed price terms, leaving primes to absorb the residual risk.
6. Cost risk compounds over long performance periods, particularly when input prices are rising.
7. Small businesses and new federal government entrants may lack the financial flexibility to bear cost risk across multi-year contracts and may forgo opportunities altogether.
8. The highest-risk procurements may not be worth bidding, narrowing the opportunity set for risk-averse firms.

What Should Contractors Do?

While it is still unclear just how much this shift in procurement policy will impact both the federal government and contractors there are some steps contractors can take to adjust to this new policy.

1. Anticipate modifications: Primes operating under labor-hour or cost-reimbursement contracts should expect modifications converting contracts to firm fixed price even for contracts that are not among the largest at a given agency.
2. Update subcontracts in parallel: Where a prime contract converts to firm fixed price, subcontracts will likely need to be modified to align flow-down terms and risk allocation.
3. Build a sophisticated pricing model: Pricing must do more than cover costs; it must price the full risk profile of fixed-price performance, including inflation exposure on multi-year work.
4. Assess risk appetite honestly: When the all-in priced bid is uncompetitive, that is itself a signal—the procurement may not fit the contractor’s business model or risk tolerance.
5. Enhance performance management: Fixed-price contracts demand defined outcomes within a fixed cost. Early risk identification, tight tracking against scope, and disciplined execution are baseline requirements, not differentiators.
6. Invest in scope definition: Contractors best positioned to thrive will be those that negotiate clear, measurable statements of work at the outset and align internal delivery to those terms.

The procurement process will likely see a lot of changes in the near future. It is important contractors track these changes and ensure they are well positioned to compete and perform most efficiently.