Ceiling Prices

A ceiling price is the maximum amount payable under a contract or contract segment for the specified work. Once a ceiling is set, it caps what the buyer pays for that work, whatever the supplier's actual costs turn out to be. The term is used in cost-reimbursable contracts, in fixed-price incentive arrangements, and in other contracts where the final price or cost is uncertain.

In a Canadian cost-reimbursable contract with a ceiling price, the contractor must complete the prescribed work without additional payment if actual costs exceed the ceiling, unless the contract is changed under an applicable contractual provision. CanadaBuys explains this in its guidance on cost-reimbursable contracts. Ceiling prices also appear in supply arrangements, where they work differently.

Ceiling prices in cost-reimbursable contracts

CanadaBuys describes a cost-reimbursable contract with a fixed fee and a ceiling price as one where the supplier absorbs any cost above the ceiling. The contract must clearly identify what constitutes the prescribed work. Changes or additional work require advance approval, so a supplier cannot expand scope and expect the ceiling to rise with it.

CanadaBuys also identifies a ceiling-price clause for cost-reimbursable target-cost/incentive-fee contracts. In that arrangement the contract has a maximum price, and the parties share cost savings or overruns up to that maximum.

Ceiling prices in supply arrangements

Supply arrangements establish predetermined conditions for bid solicitations and resulting contracts. CanadaBuys states that many of them include ceiling prices. Here the ceiling is a maximum stated price or rate, and it lets a client department negotiate downward for a particular requirement. Details are on the CanadaBuys page for standing offers and supply arrangements.

Where ceiling prices are set in a supply arrangement and no competitive process is used, the client department generally negotiates a lower price or rate based on the actual commodity or work required. The ceiling is therefore the upper limit of the negotiation, not the expected price of the resulting contract or order.

Ceiling price compared with limitation of expenditure

A ceiling price is distinct from a limitation of expenditure. CanadaBuys pairs the ceiling-price clause with cost-reimbursable target-cost/incentive-fee contracts that have a maximum price. It pairs limitation-of-expenditure clauses with several arrangements that have no ceiling price. When you read a solicitation, check which clause the contract uses, because the two set out different payment limits.

How the U.S. Federal Acquisition Regulation treats ceiling prices

Suppliers who work with U.S. buyers or prime contractors will meet the same term there. Under FAR subpart 16.2, fixed-price contracts with adjustable prices may include a ceiling price, and adjustment is generally governed by contract clauses. A contract may establish a ceiling based on uncertainty about performance and its possible cost impact. Once established, the ceiling may generally be adjusted only under clauses providing for equitable adjustment or another specified price revision.

What a ceiling price means for a supplier bidding on Canadian contracts

• Price the work so that the prescribed work can be completed within the ceiling. Costs above it are not automatically payable.
• Read the definition of prescribed work closely. Scope changes and additional work need advance approval.
• Look for the contractual mechanism that would allow payment beyond the ceiling, such as an approved change or a clause authorizing adjustment.
• On supply arrangements, treat the ceiling as the top of the range. Expect a client department to negotiate a lower price or rate for the actual requirement.
• Confirm whether the contract uses a ceiling-price clause or a limitation-of-expenditure clause before you finalize your pricing.