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When establishing a base for adjustment, ensure that contingency allowances are not duplicated by inclusion in both the base price and the adjustment requested by the contractor under the EPA provision.If you do not require cost or pricing data, obtain adequate information to establish the base level from which adjustment will be made.As a minimum, your appraisal of cost risk should consider two areas of particular concern, contract performance risk and market risk.).

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If necessary, you may require verification of the data submitted. The key provision in an FPEPA contract is the EPA clause.

FAR identifies the four types of economic price adjustment presented in the table below.

Since things rarely happen exactly as predicted, there is usually some variation between projected and actual cost.

The greater the potential variability between the projected and actual cost, the greater the cost risk.

The Government assumes the risks inherent in the contract -benefiting if the actual cost is lower than the expected cost-losing if the work cannot be completed within the expected cost of performance.

The contractor must have an adequate accounting system. Statutory and regulatory limits on the fees that may be negotiated.

However, requiring contractors to accept unknown or uncontrollable cost risk can endanger contract performance, substantially reduce competition, and/or substantially increase contract price.

To realistically choose the proper contract type to meet a specific contract situation, you must consider the proper allocation of cost risk.

Most of those arrangements fit into two general categories fixed-price and cost-reimbursement, but labor-hour and time-and-materials contracts have characteristics of both: The market prices at risk are severable and significant.

The risk stems from industry-wide contingencies beyond the contractor's control.

The dollars at risk outweigh the administrative burdens of an FPEPA.

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