What is generally the result of a Firm Fixed Price contract regarding seller performance costs?

In a Firm Fixed Price contract, the seller assumes the responsibility for all cost overruns that may occur during the project. This type of contract establishes a set price for the goods or services delivered, providing an incentive for the seller to manage costs effectively. Since the price is fixed, any increases in performance costs that the seller incurs due to unforeseen circumstances or poor management must be absorbed by the seller themselves. This risk encourages the seller to innovate and find ways to reduce costs while delivering the required performance, as they will not receive additional payment from the buyer for exceeding the agreed-upon price.

The nature of a Firm Fixed Price contract essentially places the financial burden of cost overruns on the seller, making it critical for them to carefully estimate their costs and manage the project efficiently to maintain profitability. This aspect helps protect the buyer from unanticipated cost increases but places significant pressure on the seller to deliver within the agreed budget.