What is the guidance and/or references that state that if our contract goes over 25% of the original awarded contract cost, that we need to re-compete our contract?
I think you either heard wrong or misunderstood what you heard. A Fixed Price Incentive Firm targets (FPIF) has a Ceiling Price and the Government does not pay more than the ceiling price. About 10 years ago we were told to use a 50/50 share ratio and 120% ceiling as a point of departure. See DFARs 216.403-1.
If the FPIF contract is negotiated with a target cost of $1,000,000 and a target profit of 12%, a ceiling price of 120% and a share ratio of 50/50 the Government would not pay the contractor more than $1,200,000 because $1,200,000 is the ceiling price.
As long as the ceiling price is not higher than 125% the contract can’t go over the estimated cost by more than 25%. The contractor is required to deliver the product even if their costs are higher than the ceiling price, but they will not be paid more than the ceiling price.
If you were told you have to re-compete for a scope change of 25%, in general that would be correct. The 25% is not a threshold, 15% would also be out of scope. When it is out of scope the only way it would not be re-competed would be with an approved Justification and Approval (J&A).