Revolutionary FAR Overhaul Implements Fixed-Price Contracting Preference Under FAR Part 16

On July 1, 2026, the FAR Council issued a deviation revising the text of the RFO for FAR Part 16, “Types of Contracts,” to implement EO 14402, “Promoting Efficiency, Accountability, and Performance in Federal Contracting.” Each agency is responsible for implementing the deviation. As we discussed in our previous GT Alert, EO 14402 establishes fixed-price contracts as the “default and preferred method of procurement.” This preference for fixed-price contracting aims to promote “cost predictability and budget discipline,” contractor accountability, and streamline contract administration. The EO acknowledges that non-fixed-price contract types may remain appropriate in limited circumstances, including research and development and pre-production development for major systems acquisitions, but that these contracting methods should be the exception and subject to “appropriate senior-level accountability at the agency.” Consistent with EO 14402, the updated Part 16 reinforces the government’s preferences for fixed-price contracting and establishes new requirements governing the use and approval of non-fixed price contract types. 

Key Revisions to FAR Part 16

FAR Part 16 outlines the types of contracts available for government acquisitions and has historically emphasized selecting a contract type that fits the circumstances of the procurement. The updated RFO language revises the framework for contract type selection by expressly implementing EO 14402’s policy preference for fixed-price contracting.

Fixed-Price Contracts as the Default

As revised, FAR 16.102 now states that fixed-price contracts are the “default and preferred contract type,” reflecting the administration’s view that fixed pricing promotes cost predictability, accountability, and efficiency. The revised text also directs agencies to consider whether fixed pricing may be used for portions of a contract requirement, even where the entire contract or order cannot be structured on a fixed-price basis. This is a notable shift from the existing FAR framework, under which negotiated contracts generally “may be of any type or combination of types that will promote the Government’s interest,” subject to the limitations in Part 16. In practice, agencies may increasingly seek to break requirements into separately priced deliverables to maximize the use of fixed pricing.

New Approval Requirements for Covered Contracts and Orders

The updated Part 16 further creates a new category of “covered contracts or orders” that are not structured as traditional fixed-price arrangements. Covered contracts include contracts that are other than fixed-price, firm-fixed-price level-of-effort contracts, and hybrid contracts containing either of those elements. For covered contracts or orders that exceed the applicable dollar threshold, the contracting officer must prepare a written justification incorporating the documentation required under FAR 16.103 and any applicable determinations and findings. The justification must then be approved by the agency head (delegable only to the agency’s chief acquisition officer or a non-career agency official in the Senior Executive Service) before the covered contract or order may be used. The agency-specific approval thresholds are at or above:

• $100 million for the Department of Defense;
• $35 million for NASA;
• $25 million for the Department of Homeland Security; and
• $10 million for remaining federal agencies

Exceptions

The updated language excludes multiple-award contracts themselves, although task orders, delivery orders, and Blanket Purchase Agreements issued under multiple-award contracts may still be subject to the approval requirement. Contracts in support of emergency responses, major disasters, and contingency operations are also excluded, as are research and development contracts or orders and pre-production development contracts or orders for major systems acquisitions.

Timing and Contract Review

The revised language takes effect on July 15, 2026. For new solicitations, required justifications must be approved before their release beginning on that date. For: (i) solicitations issued before July 15 that have not resulted in an award by July 15, and (ii) existing contracts or orders with, as of July 15, at least 18 months of performance (including options) remaining, justifications providing the approvals “[s]hould be issued no later than July 15, 2027.”

Separately, EO 14402 requires each agency head, within 90 days of the EO, to review the agency’s 10 largest non-fixed-price contracts by dollar value and, to the maximum extent practicable and consistent with the law, seek to modify, restructure, or renegotiate those contracts to “facilitate use of fixed prices and performance-based incentives for contract deliverables to the maximum extent practicable.” Because EO 14402 was issued on April 30, 2026, this 90-day review period runs through July 29, 2026.

Economic Price Adjustments and Cost-Reimbursement Oversight

The updated FAR Part 16 also revises related provisions governing fixed-price contracts with economic price adjustment and cost-reimbursement contracts. Revised FAR 16.203-3 narrows the circumstances in which a fixed-price contract with economic price adjustment may be used, permitting this contract type only when the contracting officer determines it is necessary, such as to protect both the contractor and the government against significant fluctuations in labor or material costs or to provide for price adjustments based on changes in the contractor’s established prices.

In addition, the requirements for cost-reimbursement contracts have been modified to require designation of a contracting officer’s representative to monitor contractor performance and cost controls. These revisions underscore that, along with the preference for fixed-price contracts, non-fixed-price contracts will be subject to additional monitoring and scrutiny – both at the point at which the methodology is selected and throughout contract performance.

Takeaways

The implementation of EO 14402 in FAR Part 16 will increase the burden on contracting officers and agencies seeking to use other than fixed-price contracts, whose use should decline and approval for which may lead to delays. While some contracts in support of emergency services, contingency operations, and research and development are excluded, the preference has broad effect. Even for some existing contracts, agencies will need to provide justification and approval for the continued use of other than fixed-price terms. Notably, since fixed-price award fee and incentive contracts are not covered by the new restrictions if the fee or incentive is “based solely on factors other than cost” (e.g., is performance based), the use of these contracts will likely increase.

In addition, the revisions emphasize that when other than fixed-price contract methods are used, performance and costs will be closely monitored. Contractors may see increased use of fixed-price structures in new procurements and should consider the impact of the revised FAR Part 16 provisions on their pricing approaches. Contractors may wish to assess the potential impact of fixed-pricing or enhanced monitoring now, particularly in light of the EO’s July 29, 2026, deadline for agencies to review their 10 largest non-fixed-price contracts.

Finally, the FAR Council intends to conduct rulemaking pursuant to the notice and comment process at 41 U.S.C. 1707, which might lead to future changes in the language in the deviation.

*Special thanks to Project Assistant Ema Amuial for contributing to this GT Alert.