Fixed Price Inversion is what happens when a contract you priced as cost-reimbursable is converted to fixed price without your cost structure being rebuilt for it. Under cost reimbursement, an indirect rate that comes in high is recovered. Under fixed price, it is absorbed — the same rate that was a billing detail becomes the whole margin. The term was coined by Jenny Clark, GovCon CFO and founder of Solvability, to name a risk that Executive Order 14402 turned from occasional into routine.
Why this is happening now
On 30 April 2026, Executive Order 14402, Promoting Efficiency, Accountability, and Performance in Federal Contracting, made fixed-price the default contract type across the federal government. Agencies must now use fixed-price contracts to the maximum extent practicable, and a contracting officer who wants anything else has to justify it in writing to the agency head. Above a dollar threshold — $10 million at most agencies, higher at DoW, NASA and DHS — the approval climbs further.
The provision that reaches existing contractors is the one people missed. Within 90 days, agencies were directed to review their ten largest non-fixed-price contracts and attempt to restructure them. That window closed at the end of July 2026. The regulatory amendments and training followed at 120 days.
What inverts, exactly
Under a cost-reimbursable contract, your indirect rates are provisional. You bill at an estimate, you settle to actuals, and if your G&A came in three points higher than you projected, you recover the difference. The rate is an accounting mechanism. It is not where you make or lose money.
Under fixed price, the price is the price. The same three points now come out of fee, and fee on a federal contract is thin to begin with — a typical fee percentage runs about 6% to 12%. Three points of unrecovered G&A against an eight-point fee is not a haircut. It is most of the job.
That is the inversion: the number that used to be the least interesting line in your accounting becomes the number that decides whether the contract earns. Nothing about your costs changed. What changed is who absorbs the error.
The three things that go wrong
- The rate was built for recovery, not for pricing. Provisional rates are set conservatively low on purpose, because the settlement fixes them later. Carry a deliberately low provisional rate into a fixed-price bid and you have priced in a shortfall on purpose.
- Fee was sized for a cost-type risk profile. On cost reimbursement you carry performance risk. On fixed price you carry performance risk and cost risk, including the indirect rate. The fee that was adequate for one is not adequate for both, and the conversion conversation rarely reprices it.
- The period of performance was never forward-priced. A rate built on last year’s actuals, applied to a three-year fixed-price award, is a bet that nothing about your headcount, benefits costs or business base changes for three years.
What to do before you agree to a conversion
- Rebuild the rates from actuals — a trial balance for the most recent complete fiscal year, pools and bases defined the way you will actually run them, not the way the provisional agreement described them.
- Forward-price the whole period of performance. Escalate labor, benefits and your indirect base across every year of the award, not just year one.
- Reprice the fee for the risk you are now carrying. This is the step that gets skipped, and it is the one with the money in it.
- Model the downside before you sign. Run your own numbers and see what a two- or three-point rate miss actually costs on this specific contract.
Not sure your rates would survive the conversion?
Rebuilding indirect rates for fixed-price work is the core of what Solvability does. If a conversion conversation is already on your calendar, the rebuild should happen before the meeting, not after it.
See how the work runsModel it against your own numbers
The Fixed Price Inversion Analyzer takes your FTE count, hours, average pay, and your fringe, overhead and G&A rates, and returns the fee you should be asking for on the fixed-price conversion — and the profit you leave on the table if you accept the old one.
| FTE | Headcount direct labor FTEs |
4 | |
| HRS | Hours / FTE standard year = 1,920 |
1,920 | |
| PAY | Avg Direct Pay Rate | $/hr |
— |
| FRG | Fringe Rate | % |
— |
| OH | Overhead Rate | % |
— |
| G&A | G&A Rate | % |
— |
| CST | Total Cost | — |
| FEE | Fee — As Bid (Cost Plus) what you submitted |
% |
— |
| FEE | Fee — Should Have Bid (Fixed Price) covers your risk |
% |
— |
| BID | Total Bid Price contract ceiling — same either way |
— | |
| LOST | Profit Left on the Table | — |
What Happened
The contracting officer converted your cost-plus contract to fixed price at the same ceiling — the same Total Bid Price you submitted. The price did not change. The risk did.
On a cost-plus contract, cost overruns are recoverable. On a fixed price contract, every unexpected cost — a key employee leaves, health insurance renews higher, hours burn faster than planned — comes directly out of your fee.
The difference between 8% and 12% fee is not extra profit. It is your risk reserve. Without it, the first surprise puts you in the red.
If your contracting officer just called about converting to fixed price — or you’re about to bid a fixed price task order — you need to know your numbers before you sign anything.
Book a Financial Clarity Session →Frequently asked questions
What is Fixed Price Inversion?
It is what happens when a contract priced as cost-reimbursable is converted to fixed price without the cost structure being rebuilt for it. Indirect rates that would have been recovered at settlement are now absorbed against fee, so a rate that was an accounting detail becomes the margin. The term was coined by Jenny Clark of Solvability.
Does Executive Order 14402 force my contract to convert?
It does not convert existing awards automatically. It makes fixed price the default for new work, requires written justification and senior approval for anything else, and directed agencies to review and attempt to restructure their ten largest non-fixed-price contracts within 90 days of 30 April 2026. In practice that means the conversion conversation reaches far more contractors than it used to, and it arrives with agency deadlines attached.
How much should fee go up on a fixed-price conversion?
There is no single number, because it depends on how much indirect rate risk you are absorbing and over how long a period of performance. The right method is to model the rate miss you can plausibly suffer, price that exposure, and add it to the fee you carried on the cost-type version. A typical federal fee runs about 6% to 12%, so the room to be wrong is small.
Can I just use my provisional indirect rates for a fixed-price bid?
You can, and it is one of the more expensive mistakes available. Provisional rates are usually set low on purpose because settlement corrects them later. On fixed price there is no settlement, so a conservative provisional rate becomes a priced-in loss.