A fixed-price contract is a type of contract for the supply of goods or services, such that the agreed payment amount will not subsequently be adjusted to reflect the resources used, costs incurred or time expended by the contractor. This contract type may be contrasted with a cost-plus contract, which is intended to cover the costs incurred by the contractor plus an additional amount for profit, and with time-and-materials contracts and labor-hour contracts.[1] Fixed-price contracts are one of the main options available when contracting for supplies to governments.
Fixed prices can require more time, in advance, for sellers to determine the price of each item. However, the fixed-price items can each be purchased faster, but bargaining could set the price for an entire set of items being purchased, reducing the time for bulk purchases. Also, fixed-price items can help in pre-determining the value of an inventory, such as for insurance estimates.
Such contracts continue to be popular despite a history of failed or troubled projects, although they tend to work when costs are well known in advance. Some laws mandate a preference for fixed-price contracts, however, many people maintain that such contracts are actually the most expensive, especially when the risks or costs are unknown in advance.[2]
According to the Project Management Body of Knowledge (7th edition) by the Project Management Institute (PMI), fixed-price contract is an "agreement that sets the fee that will be paid for a defined scope of work regardless of the cost or effort to deliver it".[3]
- ^ General Services Administration, Federal Acquisition Regulation Subpart 16.2 - Fixed-Price Contracts, effective 12 April 2023, accessed 16 January 2024
- ^ Weigelt, M. (2009), Fixed-price contracts required by stimulus law Archived 2021-12-04 at the Wayback Machine, 17 February 2009
- ^ Project Management Institute 2021, Glossary §3 Definitions.