TOPIC: Fixed Price Incentive Fee and Fixed Price Economic price adjustment Contracts

Hi Experts,

I have a query related to contract types FPIF and FPEPA.

Query: I need clarification on Fixed price Incentive fee(FPIF) and Fixed Price Economic Price Adjustment(FPEPA) contracts. Need to exactly understand in what situations do we use these contracts.
1. FPIF: PMBOK doesn't call out the situations where we should use this contract so if you could explain with example, it' be great.
2. FPEPA: PMBOK says that this contract should be used whenever the seller's performance period spans considerable period of years... Can you please explain this? I understood payment in different currency.

Clarifications to this will enable me to answer any queries related to FPIF and FPEPA contracts related queries.

Thanks,
Vivek Gupta

Hi Vivek,

The Fixed Price Incentive Fee (FPIF) provides a financial performance incentive for the supplier. For example, if you have a $1,000,000 contract, you might offer the vendor an extra $1,000 for every month that the vendor completes the contracted work early. This type of contract might be used when time is of the essence. Think about a highway repair project where there is serious impact to commuters for every day the highway is out of service.

The Fixed Price Economic Adjustment (FPEPA) contract is typically used for longer-term contracts where there are uncertainties about future economic conditions. The most common example would be the risk of inflation over the course of the project. In an inflationary economic environment, you might want to include an adjustment to counter the effects of inflation. For example, if inflation is expected to run 10% per year over the course of a 3 year project, you might want to include a 10% price adjustment per year in the contract.

I hope that helps.

Thanks a lot Donald, this clarifies my doubts!!! Really appreciate your timely help on this..

You are very welcome.

Hi Vivek,

Very good explanation by Donald and by Sachin. On the FPEPA, I will add one more clarification. Inflation depends on many economic factors such as index price, exchange rate, interest rate in a country, devaluation of currencies, commodity index etc. Not sure about your background but generally in Sourcing, when we sign contract with overseas suppliers, typically there are clauses covering most of these affecting factors. I will give an example here. Metal prices across the global market plummeted in late 2018 and reached to the bottom until Q1 of 2019. Due to the ongoing LTAs ( Long Term Contracts ), we were either able to recovered $$M from large metal product suppliers following the metal market index or locked down prices for future recovery.

Hope this clarifies.