Fixed-Price Contracting Returns as the Default for Federal Contractors

Federal acquisition policy is shifting fixed-price contracting back to the default and preferred approach under Executive Order 14402 and updated FAR Council guidance. With implementation beginning in July 2026, government contractors should consider how contract type, pricing risk, existing awards, and contract administration may be affected.

Highlights

• Fixed-Price Default. Executive Order 14402 and updated FAR Council guidance establish fixed-price contracts as the default and preferred contract types for federal procurement.
• July 2026 Implementation. Agencies were directed to update their Revolutionary FAR Overhaul class deviations for FAR parts 16 and 52 by July 15, 2026, with the guidance applying to certain new solicitations, pending awards, and existing contracts.
• Non-Fixed-Price Justifications. Covered non-fixed-price contracts and orders exceeding specified agency thresholds require written justification and agency head approval before award, subject to limited exceptions.
• Contractor Risk. Greater use of fixed-price contracting may shift additional cost, performance, and pricing risk to government contractors, particularly those providing service-based support.
• Existing Contract Impact. Agencies may seek to modify, restructure, or renegotiate certain non-fixed-price contracts, making contract type, remaining performance period, pricing assumptions, and change management important considerations.

Back on April 30, 2026, Executive Order (EO) 14402, Promoting Efficiency, Accountability, and Performance in Federal Contracting, was issued. Then, on July 1, 2026, the Federal Acquisition Regulatory Council published its June 25, 2026, guidance and updated the Revolutionary FAR Overhaul (RFO) deviation documentation to implement the EO.

The Executive Order

Executive Order (EO) 14402, Promoting Efficiency, Accountability, and Performance in Federal Contracting, addressed the concern that “For too long, Federal procurement has tolerated unpredictable costs, bloated overhead, and weak performance incentives” and that “best business practices [must be implemented] to protect taxpayer dollars, hold contractors accountable, and achieve demonstrable returns on investment.” Section 2 of the EO requires a default to fixed-price contracting and requires:

• To the maximum extent, agencies must utilize fixed-price contracts that tie profit to performance-based metrics when appropriate.
• Written Justification by the contracting officer for the use of other than fixed-price.
• If the value exceeds the following thresholds, then the agency head must approve the contract in writing:
  • $100M for the Department of War
  • $35M for the National Aeronautics and Space Administration;
  • $25M for the Department of Homeland Security; and
  • $10M for all other Agencies.
• Exceptions for emergency, major disaster, or contingency operation and research and development or pre‑production development for major systems.

It also requires that:

• Within 90 days of the date of the EO, each agency shall review and “seek to modify, restructure, or renegotiate its 10 largest non-fixed-price contracts by dollar value” to fixed-price and performance-based incentives for contract deliverables.
• Semi-annually reporting to the Director of the Office of Management and Budget (OMB) on the number of, value of, and written justifications for any non-fixed-price contracts approved.
• Within 45 days of the date of the EO, the Director of OMB shall issue guidance to agencies.
• Within 120 days of the date of the EO, the Administrator for the Office of Federal Procurement Policy (OFPP) shall, in coordination with the Federal Acquisition Regulatory Council, amend the Federal Acquisition Regulation (FAR).

FAR Council Guidance and FAR Deviation

The FAR Council updated FAR part 16 and 52 to implement EO 14402, establishing fixed-price contracts as the default and preferred method of procurement. Agencies were directed to update their Revolutionary FAR Overhaul (RFO) class deviations for parts 16 and 52 by July 15, 2026. The FAR Council will engage in future rulemaking, as required by 41 U.S.C. 1707, to provide notice and allow public comment.

FAR 16.102(b) wording changed to state “Fixed-price contract types are the default and preferred contract types. If a fixed-price contract type is not appropriate for an entire contract, consider whether a portion of the contract can be established on a fixed-price basis.”

FAR 16.104, Executive Order 14402 justification for covered contracts and orders, now requires that the head of the agency issuing a non-fixed price contract, exceeding the thresholds below, approve a written justification prior to award:

• $100M, for DoD;
• $35M, for NASA;
• $25M, for the Department of Homeland Security; and
• $10M, for all other Federal agencies.

For hybrid contracts or orders, the threshold is based on the total value of the other than fixed-price contract line items. Agencies can decide whether the justification requirement applies at the contract or order level for single-award indefinite-delivery indefinite-quantity (IDIQ) contracts and blanket purchase agreements (BPA). For multiple-award IDIQs and BPAs, each order exceeding the threshold must be justified if it is not fixed-priced.

The head of the agency may delegate the justification approval only to the agency's chief acquisition officer or to another non-career official in the Senior Executive Service within the agency.

The following exceptions apply:

• Contracts in support of a response to an emergency, major disaster, or contingency operation;
• Research and development contracts or orders (see part 35); and
• Pre-production development for a major system acquisition (see part 34).

Changes in FAR 52 contract clauses were limited to those resulting from references to FAR part 16 that were updated.

When Does This Take Effect?

The FAR Council guidance states that the guidance is applicable as follows:

• Solicitations issued on or after July 15, 2026.
• Solicitations issued before July 15, 2026, but resulting contracts or orders have not yet been awarded.
• Existing contracts or orders if the remaining period of performance (including all options) is at least 18 months as of July 15, 2026.

The FAR Council did not address the requirement that, within 90 days of the date of the EO, each agency review and “seek to modify, restructure, or renegotiate its 10 largest non-fixed-price contracts by dollar value” to fixed price and performance-based incentives for contract deliverables. This does not imply this is going away. It is simply that the FAR did not need to change to make it happen. As of July 6, 2026, no memorandum from OMB or OFPP has been issued regarding this requirement.

What Does This Mean for Government Contractors?

Contracting officers are not going to want to consider contract types that require more documentation (the written justification), getting approval by their boss’s boss, if not higher than that, and the added risk that an inspector general (IG) auditor/reviewer is going to second-guess them with perfect 20-20 hindsight. So, you are going to need to be able to price in the additional risk the Government is asking you to take on.

Everything rolls downhill. If this is a requirement for the contracting officer, it will not be long before this is an exception for prime and higher-tier contractors by DCMA Contractor Purchasing System Reviewers and DCAA auditors. And if “the exception” is there, why not bake it into the DFARS purchasing system requirements?

The Government is not going to want to pay for the likely increased prices that will result. You will need to be prepared to support the cost of the added risk being passed down to you and your supply chain.

The government contractors that will feel the biggest impact are those providing service-based support to the Government, as cost reimbursement and Time and Material (T&M) are likely to be taken off the table. Program offices have long enjoyed the flexibility of contracting for services other than fixed-price contracts. You need to be prepared to push back on out-of-scope requests and to anticipate a potential influx of change orders throughout the period of performance.

Additionally, you may face the Government seeking to reopen negotiations on already awarded contracts to change the contract type. This is not something you should even consider without a deep dive into the potential cost impact and making sure the Government understands this will require consideration (i.e., money) on their part.

Managing the Shift Toward Fixed-Price Contracting

The expanded use of fixed-price contracting may require government contractors to price more complex work and account for greater cost and performance risk before award. Pricing teams and estimators will need to carefully evaluate assumptions, exclusions, scope, and the potential cost of future issues that the Government may expect the contractor to absorb. Redstone GCI supports government contractors with cost and pricing analysis, estimating and proposal support, solicitation and contract reviews, contract administration processes, change order documentation, and training for pricing, contracts, accounting, and operational personnel as these requirements take effect.

Frequently Asked Questions (FAQs)

• What is a fixed-price government contract? A fixed-price contract generally establishes an agreed price for the work. The contractor is responsible for managing the work and its costs within that pricing arrangement.
• What changed for government contracting? Federal agencies are now directed to treat fixed-price contracts as the default and preferred contract type. Agencies may still use other contract types, but additional justification and approval may be required in certain situations.
• When does this change take effect? The updated FAR guidance applies beginning July 15, 2026. It can affect new solicitations, contracts or orders that have not yet been awarded, as well as certain existing contracts with significant performance time remaining.
• Does this mean every government contract must be fixed-price? No. Other contract types can still be used, and certain types of work are excluded from the new requirements. However, agencies may face additional requirements when choosing a non-fixed-price contract.
• Why does fixed-price contracting matter to government contractors? Fixed-price contracts can place more cost and performance risk on the contractor. Contractors may need to pay closer attention to pricing, the work included in the contract, and requests that change the original scope.
• Can an existing contract be changed to a fixed price? Potentially. Agencies have been directed to review certain large non-fixed-price contracts and seek changes where appropriate, which could lead to discussions about changing the contract structure.