FPI

FPI contracts are authorized under FAR 16.403 and are most commonly used for defense production programs where requirements are reasonably defined but some cost risk remains. They incentivize cost efficiency while protecting both parties with defined floors and ceilings.

Core FPI structural elements:

• Target cost — negotiated expected cost
• Target profit — profit the contractor earns at target cost
• Ceiling price — the absolute maximum the government will pay (typically 115–135% of target cost)
• Share ratio — how cost variances are split (e.g., 70/30 government/contractor)
• Point of Total Assumption (PTA) — the cost level at which the contractor absorbs all additional costs (effective FFP beyond this point)

Two variants:

• FPI-Firm Target (FPIF) — target cost and profit are set at award and remain fixed. Most common variant.
• FPI-Successive Targets (FPIS) — initial target is set at award, but a firm target is negotiated later when better cost data is available. Used for long-lead or development programs.

FPI is used extensively in defense production contracts — aircraft, vehicles, weapons systems — where DoD wants to incentivize efficient production without the full risk of FFP on complex hardware. Understanding the Point of Total Assumption is critical: once you pass the PTA, every additional dollar of cost comes out of your profit.