Sign In
  • Question

    Ceiling price is one of the requirements of the subject clause, so wondering who provides that price? IAW FAR 16.403-2 Fixed-price incentive (successive targets) contracts, the ceiling price is negotiate at the outset. My assumption is that the ceiling price is part of offerors bid, which is addressed during discussions before its established (agreed upon) and entered into the clause as part of the contract. Is that correct?


    Answer

    Establishing a ceiling price for a Fixed-price incentive successive targets (FPIS) contract can be very tricky.  According to DFARS PGI 216.403-2, the reason you would be doing an FPIS arrangement vs. and FPIF arrangement is because cost and pricing information were not sufficient to permit the negotiation of firm targets at the outset.  Ceiling price is determined by the government after completing an extensive risk analysis.  Share ratios and target costs (or targets in the case of a FPIS) need to be determined in order to establish the ceiling price.  There is very little written in the guides and regulations in terms of successive targets, but DFARS 216.403-1(b)(2) states, “The contracting officer shall pay particular attention to share lines and ceiling prices for fixed-price incentive (firm target) contracts, with a 120 percent ceiling and a 50/50 share ratio as the point of departure for establishing the incentive arrangement.”  The 120% ceiling is calculated at 120% of the target cost.  Although this paragraph is in regards to FPIF, it may be a good departure point for FPIS.  Since you will have multiple targets in your cost estimate based on multiple levels of risk, I would expect you may calculate multiple ceiling prices.

    Again, the 120% ceiling is only a point of departure and not a recommended ceiling price.  The Contract Pricing Reference Guides (CPRG) found at https://www.dau.edu/tools/t/Contract-Pricing-Reference-Guides-(CPRG) states that the ceiling price should be structured so that the ceiling price is reached when contract cost reaches the pessimistic cost estimate. Accordingly, the ceiling price is equal to the pessimistic cost estimate plus the estimated profit at that cost.

    The CPRG also states “In negotiating a ceiling price you should consider the uncertainties involved in contract performance and their cost impact. This ceiling should provide for assumption of a reasonable proportion of the risk by the contractor and, once established, may be adjusted only by operation of contract clauses providing for equitable price adjustment or other revision of the contract price under stated circumstances.”

    All elements of a Fixed Price Incentive arrangement are negotiable, including ceiling price.  The offeror will likely calculate their ceiling price position based on their own risk analysis.  I would expect the ceiling price estimate on both the government and offeror to be on the higher end of the risk analysis since in the situation for using a FPIS arrangement the unknowns would cause higher risk.

    You can ask this question and others about Contracting in DAU's weekly virtual series called CONnect Live held each Thursday at 11:30 a.m. Eastern Time. More information is at https://www.dau.edu/events

    Open full Question Details
Chat with DAU Assistant
Bot Image