FAR Council Updates Class Deviation Text for Part 16 to Implement Executive Order on Preference for Fixed-Price Contracts; Wiley Updates FAR and DFARS Overhaul Site
WHAT: On July 1, 2026, the FAR Council posted updated text for the “Revolutionary FAR Overhaul” for FAR Part 16 and related FAR Part 52 clauses. This comes on the heels of Executive Order 14402, Promoting Efficiency, Accountability, and Performance in Federal Contracting, establishing fixed price contracts as the Government’s preferred contract type. Among other things, the update establishes dollar thresholds for the Department of Defense (DOD), National Aeronautics and Space Administration (NASA), Department of Homeland Security (DHS), and all other agencies for required justifications at the agency head level if the agencies intend to issue a contract or order that is other than fixed-price or is firm-fixed-price, level-of-effort, including for contracts and orders that have already been issued but have remaining performance periods of at least 18 months as of July 15, 2026.
In addition, go to the Read More link to find out about Wiley’s update to its FAR and DFARS Overhaul website.
WHEN: The FAR Council posted the updated Part 16 text and class deviation guidance on July 1, 2026. The justification requirement applies to:
- Solicitations issued on or after July 15, 2026;
- Solicitations issued prior to July 15, 2026, where the resulting contract or order has not yet been issued; and
- Existing contracts or orders if the remaining period of performance, including options, is 18 months or longer as of July 15, 2026.
WHAT IT MEANS FOR INDUSTRY: Consistent with EO 14402, contractors are likely to see an increase in use of fixed-price contracts or orders under single and multiple award vehicles. But they may also face requests to either justify or renegotiate other than fixed-price contracts or orders where there are more than 18 months of performance remaining, including options. Agencies may also choose not to exercise options that are for other than fixed-price terms. And contractors may experience delays of solicitations and awards of other than fixed-price contracts or orders over the identified thresholds as justification of those contracts await agency head approval.
FAR Part 16 Class Deviation Update
FAR 16.102(b) has been updated to state explicitly that fixed-price contracts are the “default and preferred contract type” and suggests using fixed pricing for portions of contracts or orders if the entire contract or order cannot be fixed-price.
Core changes are found in FAR 16.104, entitled “Executive Order 14402 justification for covered contracts and orders.” A “covered contract or order” is one that is:
- “other than fixed-price,”
- firm-fixed-price level-of-effort, or
- a “hybrid” that includes one or more elements of an other-than-fixed price or firm-fixed-price level-of-effort term. Time-and-material, labor-hour contracts or orders, and letter contracts are considered covered contracts or orders, as noted below.
Unless an exception applies, FAR 16.104 establishes the following thresholds that would require approval of justification by the head of the agency, not the contracting officer, prior to using a covered contract or order type. Consistent with the EO, the agency head may only delegate justification approval to the agency chief acquisition officer or another non-career official in the Senior Executive Service of the agency.
Thresholds for Use of Covered Contract or Order
- $100 million (M) for DOD
- $35M for NASA
- $25M for DHS
- $10M for all other agencies
A “hybrid” contract is a covered contract or order if the other-than-fixed price or firm-fixed-price level-of-effort portion meets or exceeds the threshold, and a single award IDIQ contract is covered if the estimated total value of the known or forecasted covered orders meet or exceed the thresholds. If the contract only allows covered orders, then the contract ceiling price governs. For BPAs, the agency head determines whether the justification requirement applies at the BPA or order stage. The justification requirement does not apply at the contract level for multiple award contracts but does apply to task and delivery orders or BPAs under them.
Contracts in support of emergency response, major disasters, or contingency operations, or for research and development or pre-production development for a major system acquisition, are excepted. Although not labeled as an exception, a justification is not required for fixed-price incentive contracts or fixed-price award fee contracts, where the incentive or fee is based solely on factors other than cost. Per overhauled FAR 16.202-1, these contracts are considered fixed price.
The timing for justifications for covered contracts or orders is as follows:
- For new solicitations, justifications must be approved prior to release starting July 15, 2026.
- For solicitations issued prior to July 15, 2026, where there is not yet an award, and for existing contracts or orders with 18 months or more of performance remaining as of July 15, 2026, justifications must be approved no later than July 15, 2027.
Conforming changes to identify the justification requirement are made to FAR 16.206-3 (regarding firm-fixed-price level-of-effort contracts), FAR 16.301-3 (regarding cost reimbursement contracts), FAR 16.401-2 (regarding cost reimbursement incentive or award fee contracts), FAR 16.601-3 (regarding time-and-material contracts), and FAR 16.603-3 (regarding letter contracts).
As noted in our analysis of the EO, seeking to maximize fixed-price contracting is not novel. The challenge has always been with ensuring that the product or service can be provided most cost-effectively on a fixed-price basis, which necessarily factors in contingencies and risks, or by some other pricing mechanism. These revisions to FAR Part 16, as EO 14402 intended, will likely increase the use of fixed-price contracts. Because fixed-price incentive and award fee contracts are not covered if the incentive or fee is not related to cost (i.e., is performance based), it is likely these contract types will also increase. Because of the agency head approval requirement and limited delegation authority, solicitations and contracts for other than fixed-price, such as cost-reimbursement, time-and-material, and labor hour contracts, will likely be delayed.
The outstanding question is how agencies will handle the requirement for justifications of previously awarded (and partially performed) contracts that have more than 18 months of performance remaining, including options. Will agencies require contractors to justify the contract type the agency previously selected and awarded? Will there be requests for renegotiation of existing contracts, even years into performance? And how will options be handled? Under existing law, an option must be exercised strictly in accordance with its terms. See, e.g., Freightliner Corp. v. Caldera, 225 F.3d 1361 (Fed. Cir. 2000) (“For an option order to be effective, the Government must exercise the option in exact accord with the terms of the contract.”). Contractors may find themselves renegotiating pricing terms for options under threat of or facing the potential of non-exercise of options that include other than fixed-price terms.
Wiley on the Leading Edge of FAR and DFARS Overhaul Tracking
At Wiley, we have been at the forefront of tracking developments like this one since the inception of the “Revolutionary FAR Overhaul.” Now that the FAR overhaul has proceeded to the second, formal rulemaking stage, Wiley has updated its FAR and DFARS Overhaul site to ensure that contractors can easily access the information they need about this historic process.
- FAR Overhaul Rulemaking site: Wiley’s analysis of the formal rulemaking phase of the FAR overhaul, updated as that phase of the overhaul progresses.
- FAR Overhaul Class Deviations site: Wiley’s Part-by Part analysis of the notable RFO class deviation text changes, as well as information about the new FAR Companion, which includes non-regulatory guidance for government acquisition professionals.
- DFARS Overhaul Class Deviations site: Wiley’s Part-by-Part analysis of the notable DFARS class deviation text changes.
Wiley’s Government Contracts Practice will continue to monitor all developments under the Revolutionary FAR Overhaul to help contractors adapt and stay nimble in this rapidly changing environment.
