A Fixed-Price Contract is an agreement that sets a predetermined fee for a defined scope of work, regardless of the actual cost or effort required to deliver it. This contract type transfers financial risk to the seller, ensuring cost stability for the buyer.
Key Aspects of Fixed-Price Contracts
- Price Is Set in Advance – The total cost is agreed upon before work begins.
- Risk Falls on the Seller – The contractor absorbs any cost overruns.
- Requires Well-Defined Scope – Works best when deliverables are clearly specified.
- Common in Vendor and Government Contracts – Often used for procurement and outsourced work.
Types of Fixed-Price Contracts
| Contract Type | Description | Best Use Case |
|---|---|---|
| Firm-Fixed-Price (FFP) | A fixed amount is agreed upon, with no adjustments. | Standard projects with well-defined scope. |
| Fixed-Price Incentive Fee (FPIF) | The seller can earn additional payments based on performance targets. | Projects where efficiency and cost savings are incentivized. |
| Fixed-Price with Economic Price Adjustment (FPEPA) | Adjusts pricing based on external economic conditions (e.g., inflation, currency rates). | Long-term contracts where cost fluctuations are likely. |
Example Scenarios
Software Development
A company hires a vendor to develop a website for $50,000, regardless of development time.
Construction Project
A contractor agrees to build an office building for $2 million, covering materials and labor.
Manufacturing
A supplier provides 10,000 circuit boards at a fixed price per unit, ensuring cost stability.
Why Fixed-Price Contracts Matter
- Provides Cost Predictability – Buyers know project costs upfront.
- Reduces Financial Risk for Buyers – Sellers bear any cost overruns.
- Encourages Efficiency from Sellers – Contractors manage budgets effectively.
- Prevents Scope Creep – Requires well-defined requirements.
See also: Firm-Fixed-Price (FFP) Contract, Cost-Plus-Fixed-Fee (CPFF) Contract, Time & Materials (T&M) Contract, Procurement Management.