Definition
A Fixed-Price Contract with Prospective Price Redetermination is a type of fixed-price contract that sets a firm price for an initial period of performance and then allows that price to be renegotiated prospectively, meaning before the next period begins, at scheduled intervals throughout the contract.
In simple terms, the price is firm to start, but at agreed milestones during performance, both parties sit down and negotiate a new firm price for the next period based on actual cost experience so far.
The Simple Explanation
Imagine the Army needs to procure a specialized electronic component over three years. The design is well established enough to price the first year firmly. But by year two, manufacturing learning curves, component availability, and labor rates may have shifted enough that neither party can fairly estimate the cost. Locking in a three-year price upfront would either overcompensate the contractor for risk or expose them to significant loss.
A prospective price redetermination contract solves this. Year one has a firm fixed price negotiated at award. At the end of year one, before year two begins, both parties review actual costs, assess what has changed, and negotiate a new firm price for year two. The process repeats before year three. The price is always firm going forward and is never retroactively adjusted.
Key Characteristics
- Firm price for the initial period: The first period of performance has a fully locked-in price, just like an FFP contract.
- Prospective redetermination: Price adjustments are negotiated before each new period begins, not after. This is what makes it "prospective" rather than "retroactive."
- Each subsequent period must be at least 12 months: The FAR requires that redetermination periods be meaningful, not monthly or quarterly renegotiations.
- Optional ceiling price: The contract may include an overall ceiling price that limits how high the redetermined prices can go across all periods, providing a backstop for the government.
- Initial period should be the longest feasible: The FAR instructs contracting officers to make the first firm-priced period as long as possible. Redetermination periods come after the government has accumulated enough cost experience to price more confidently.
- Governed by FAR 16.205.
When Is It Used?
Prospective price redetermination is appropriate for quantity production or services where:
- A fair and reasonable firm fixed price can be established for an initial period but not for the full contract term
- The requirement is expected to continue over multiple years with evolving cost factors
- There is enough production history from the first period to support confident pricing of subsequent periods
- The government wants to retain the discipline and accountability of fixed-price contracting across all periods rather than shift to cost-reimbursement
Common use cases include:
- Long-term spare parts production for major defense systems where early costs are known but later costs are not
- Multi-year service contracts where labor rates or support requirements may evolve
- Follow-on production contracts where a prior contract provides cost data for the first period but future periods remain uncertain
- Complex systems support contracts where performance experience drives meaningful cost updates
Prospective vs. Retroactive: What Is the Difference?
These two redetermination types are commonly confused:
- Prospective price redetermination (FAR 16.205): The price for the next period is renegotiated before that period begins. Both parties agree on a firm price going forward. No uncertainty during performance as the contractor always knows what they will be paid.
- Retroactive price redetermination (FAR 16.206): The final price is determined after performance is complete, based on actual costs. Used only for small R&D contracts at or below the Simplified Acquisition Threshold.
The key distinction: prospective is forward-looking and results in a firm price before work begins; retroactive is backward-looking and settles the price after the work is done.
Pros and Cons: A Vendor's Perspective
Pros
- Reduces long-term pricing risk: You are not locked into a price negotiated years before actual performance. Future prices reflect current realities.
- Maintains fixed-price discipline: Unlike cost-reimbursement contracts, you still have a firm price for each period, maintaining the incentive for cost control.
- Builds in natural checkpoints: Redetermination periods create regular opportunities to address cost changes, scope adjustments, and performance learnings in a structured way.
- Better than guessing: Avoids the contractor padding a multi-year FFP bid with excessive contingencies to cover unknowable future costs.
Cons
- Negotiation burden repeats: At every redetermination point, you must prepare cost and pricing data and negotiate with the government. This takes time and resources.
- Government may push back hard: Each redetermination is effectively a new price negotiation. If your costs have risen, the government will scrutinize every element. If costs have fallen, they will expect a lower price.
- Uncertainty between periods: Even though each period has a firm price, vendors face some uncertainty leading up to each redetermination, not knowing what the next period's price will be until negotiations conclude.
- Requires strong cost accounting: The pricing of subsequent periods depends heavily on actual cost data from prior periods, making accurate, detailed cost tracking essential.
Common Terms Associated with Prospective Price Redetermination
In the SLED Market
Prospective price redetermination as a formal FAR contract type does not exist in the SLED market. However, the underlying concept of pricing a multi-year contract in stages with structured renegotiation points appears in SLED procurement in other forms:
- Multi-year contracts with renewal pricing: Many SLED service contracts include annual renewal options where pricing is renegotiated before each option year is exercised, functionally similar to prospective redetermination.
- Price escalation clauses: Some SLED contracts allow pricing adjustments at set intervals based on CPI or other indexes, a simplified version of the same concept.
- Cooperative purchasing contracts: NASPO ValuePoint and Sourcewell contracts are often re-competed or refreshed on multi-year cycles with pricing updated prospectively between contract periods.
Quick Summary
A Fixed-Price Contract with Prospective Price Redetermination sets a firm price for an initial period and allows structured renegotiation of pricing for subsequent periods before each new period begins. It is used when costs can be priced confidently for the near term but not for the full contract duration. Each period has a firm, fixed price with no retroactive settlement. It provides the cost control benefits of fixed-price contracting while accommodating realistic uncertainty over multi-year production or service programs. See also: Fixed-Ceiling-Price with Retroactive Price Redetermination for the post-performance variant.
