Fixed price with economic price adjustment is primarily designed to handle which risk?

• A. Inflation or deflation
• B. Delivery delays
• C. Performance issues
• D. Quality fluctuations

Answer: (A)

Fixed-price contracts face a risk that the actual cost environment will change over the life of the project. An economic price adjustment clause directly addresses this by tying part of the contract price to a published index or formula that reflects inflation or deflation. This keeps payments aligned with actual costs for things like labor, materials, and energy, so neither party bears undue risk from shifting economic conditions. The clause can adjust the price up or down, within agreed limits, which helps preserve the contract’s fairness and feasibility over time.

This isn’t about schedule or delivery delays, which stem from timing or logistics issues, nor about how well the work is performed, nor about the inherent quality of the deliverables. Those risks are managed through other contract provisions like schedule milestones, performance guarantees, and quality assurance or acceptance criteria.