Fixed Price with Economic Price Adjustment Contract Explained
Fixed Price with Economic Price Adjustment Contract is a variation of the basic Fixed Price Contract (FP). In some of my previous articles, I have explained all the other variations of FP Contracts (as enumerated in PMBOK® Guide). In this article, I will talk about Fixed Price with Economic Price Adjustment Contract (FP-EPA).
The basic nature of FP-EPA Contract is very much like an FP Contract. But in FP-EPA Contract, special provision is made to allow price adjustments. At the beginning of the contract, the Buyer and the Seller agree upon predefined criteria for such price adjustments. This is done due to uncertainties and vagaries that are inherently present in the markets. The market dynamics and economic conditions change with time. Usually, these contracts run for a very long period spanning multiple years.
Some of the common characteristics of this type of Contract are:
- The Buyer and the Seller agree upon a Fixed Price at the time of the signing of the Contract.
- The Buyer and the Seller agree upon definite criteria for Adjusting the Final Price.
- The criteria are based on the market and economic conditions as they are beyond the Buyer’s or Seller’s control.
- Usually, the Scope of the Contract is well defined.
- Usually, these contracts run for multiple years.
- Usually, these contracts involve a lot of administrative difficulties, but money at risk outweighs the difficulties of administration.
How is an FP-EPA Contract Framed?
We already know that this type of Contract is used when there is an uncertainty in the market conditions. The uncertainties can arise due to any of the following factors:
- Changes in labor, material or other resource costs
- General inflation
- Price fluctuations in commodities
- Changes in bank interest rates
- Fluctuations in currency markets
This is not a complete list. There could be many more factors that can lead to market uncertainty. The Buyer and the Seller frame a FP-EPA Contract if they believe that such factors can influence the cost of completing the contracted work. They can either develop a simple or a complex criteria based on these factor(s).
– A multi-year software development project outsourced to a different country: interest rates & currency exchange rates fluctuate with time.
– A multi-year oil and gas exploration work: Labor & commodity rates change with time.
I hope that you were able to understand FP Contracts. Please leave a comment if you have any question.
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