A fixed-price contract is a type of

contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...

such that the payment amount does not depend on resources used or time expended by the contractor. This is opposed to a

cost-plus contract A cost-plus contract, also termed a cost plus contract, is a contract such that a contractor is paid for all of its allowed expenses, ''plus'' additional payment to allow for a profit.profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory intere ...

. Such a scheme is often used by

military A military, also known collectively as armed forces, is a heavily armed, highly organized force primarily intended for warfare. It is typically authorized and maintained by a sovereign state, with its members identifiable by their distinct ...

and

government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...

contractors to require vendors to incur the risk of cost overruns, and to control costs. However, historically when such contracts are used for innovative new projects with untested or undeveloped technologies (such as new military transports or stealth attack airplanes), it often results in failure if costs greatly exceed the ability of the contractor to absorb unexpected

cost overrun A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs. When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting, they are known ...

s. 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 Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

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.

Contract types

The United States'

Federal Acquisition Regulation The Federal Acquisition Regulation (FAR) is the principal set of rules regarding Government procurement in the United States,. and is codified at Chapter 1 of Title 48 of the Code of Federal Regulations, . It covers many of the contracts issued by ...

(FAR) provides for the following types of contract with a fixed price element: *Firm-fixed-price contract (FAR 16.202) *Fixed-price contract with economic price adjustment (FAR 16.203) *Fixed-price contract with prospective price redetermination (FAR 16.205) *Fixed-ceiling-price contract with retroactive price redetermination (FAR 16.206) *Firm-fixed-price, level-of-effort term contract (FAR 16.207) *Fixed-price incentive contract (FAR 16.403) *Fixed-price incentive (firm target) contract (FAR 16.403-1) *Fixed-price incentive (successive targets) contract (FAR 16.403-2) *Fixed-price contract with award fees (FAR 16.404). Economic price adjustment may take account of increases or decreases from an established and agreed-upon price level, actual costs or a price index.

Examples

A400M

Airbus Airbus SE (; ; ; ) is a European Multinational corporation, multinational aerospace corporation. Airbus designs, manufactures and sells civil and military aerospace manufacturer, aerospace products worldwide and manufactures aircraft througho ...

's German chief executive

Tom Enders Thomas Enders (born December 21, 1958) is a German business executive who served as the chief executive of Airbus (formerly EADS, Airbus Group) from 2012 until 2019. Since 2019, he has been the president of the German Council on Foreign Relations ...

indicated that the fixed-price contract for the

A400M The Airbus A400M AtlasNamed after the Greek mythological figure. is a European four-engine turboprop military transport aircraft. It was designed by Airbus Military (now Airbus Defence and Space) as a tactical airlifter with strategic capabil ...

transport aircraft was a disaster based on

naivety Naivety (also spelled naïvety), naiveness, or naïveté is the state of being naive. It refers to an apparent or actual lack of experience and sophistication, often describing a neglect of pragmatism in favor of moral idealism. A ''naïve'' may b ...

, excessive enthusiasm and arrogance, stating, "If you had offered it to an American

defence contractor The arms industry, also known as the arms trade, is a global industry which manufactures and sells weapons and military technology. It consists of a commercial industry involved in the research and development, engineering, production, and serv ...

like Northrop, they would have run a mile from it". He stated that unless the contract was renegotiated, the project must be abandoned.

A-12 Avenger II

The U.S.

A-12 Avenger II The McDonnell Douglas/General Dynamics A-12 Avenger II was a proposed American attack aircraft from McDonnell Douglas and General Dynamics. It was to be an all-weather, carrier-based stealth bomber replacement for the Grumman A-6 Intruder in t ...

aircraft development contract was a fixed-price incentive contract, not a fixed-price contract, with a target price of $4.38 billion and ceiling price of $4.84 billion. It was for a unique, stealthy,

flying wing A flying wing is a tailless fixed-wing aircraft that has no definite fuselage, with its crew, payload, fuel, and equipment housed inside the main wing structure. A flying wing may have various small protuberances such as pods, nacelles, blis ...

design. On 7 January 1991, the Secretary of Defense canceled the program. It was the largest contract termination in

United States Department of Defense The United States Department of Defense (DoD, USDOD or DOD) is an executive branch department of the federal government charged with coordinating and supervising all agencies and functions of the government directly related to national secu ...

history. Rather than saving costs, the new type of aircraft was projected to consume 70 percent of the

U.S. Navy The United States Navy (USN) is the maritime service branch of the United States Armed Forces and one of the eight uniformed services of the United States. It is the largest and most powerful navy in the world, with the estimated tonnage o ...

's aircraft budget within three years.

KC-46 Pegasus

The U.S.

Boeing KC-46 Pegasus The Boeing KC-46 Pegasus is an American military aerial refueling and strategic military transport aircraft developed by Boeing from its 767 jet airliner. In February 2011, the tanker was selected by the United States Air Force (USAF) as the ...

contract was a fixed price contract. Due to its history of cost overruns, it is an example of how fixed price contracts place the risk upon the vendor, in this case

Boeing The Boeing Company () is an American multinational corporation that designs, manufactures, and sells airplanes, rotorcraft, rockets, satellites, telecommunications equipment, and missiles worldwide. The company also provides leasing and product ...

. Total cost overruns for this aircraft have totaled about $1.9 billion. However, Boeing was able to absorb those costs and has gained US Air Force approval to begin producing the KC-46.

Construction

The Canadian Construction Documents Committee's "Stipulated Price Contract" (CCDC-2), revised in February 2008, provides for a property owner and

prime contractor A general contractor, main contractor or prime contractor is responsible for the day-to-day oversight of a construction site, management of vendors and trades, and the communication of information to all involved parties throughout the course of ...

to agree that work is done for a fixed price or lump sum.Pawson, O.
"Stipulated Price Contract"
''Canadian Consulting Engineer'', accessed 14 December 2019