A fixed-price contract is a type of

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

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 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 inter ...

, and with time-and-materials contracts and labor-hour contracts.General Services Administration
Federal Acquisition Regulation Subpart 16.2 - Fixed-Price Contracts
effective 12 April 2023, accessed 16 January 2024 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 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 protect ...

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. According to the

Project Management Body of Knowledge The Project Management Body of Knowledge (PMBOK) is a set of standard terminology and guidelines (a body of knowledge) for project management. The body of knowledge evolves over time and is presented in ''A Guide to the Project Management Body ...

(7th edition) by the

Project Management Institute The Project Management Institute (PMI, legally Project Management Institute, Inc.) is a U.S.-based not-for-profit professional organization for project management. Overview PMI serves more than five million professionals including over 680,0 ...

(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".

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. The document describes the procedures executive branch agencies use for acquiring products and services. FAR is part o ...

(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.

Firm Fixed Price Contract (FFP)

According to the PMBOK (7th edition) by the

(PMI), Firm Fixed Price Contract (FFP) is a "fixed-price contract where the buyer pays the seller a set amount (as defined by the contract), regardless of the seller's costs". The contractor or

vendor In a supply chain, a vendor, supplier, provider or a seller, is an enterprise that contributes goods or services. Generally, a supply chain vendor manufactures inventory/stock items and sells them to the next link in the chain. Today, these term ...

usually bears all the risk of cost increases, although guidance such as that issued by the

US Department of Defense The United States Department of Defense (DoD, USDOD, or DOD) is an executive department of the U.S. federal government charged with coordinating and supervising the six U.S. armed services: the Army, Navy, Marines, Air Force, Space Force, ...

may allow for specific circumstances "where an accommodation can be reached by mutual agreement of the contracting parties, perhaps to address acute impacts on

small business Small businesses are types of corporations, partnerships, or sole proprietorships which have a small number of employees and/or less annual revenue than a regular-sized business or corporation. Businesses are defined as "small" in terms of being ...

and other suppliers".

Fixed Price Economic Price Adjustment Contract (FPEPA)

According to the PMBOK (7th edition) by the

(PMI), Fixed Price Economic Price Adjustment Contract (FPEPA) is a "fixed-price contract, but with a special provision allowing for predefined final adjustments to the contract price due to changed conditions, such as inflation changes, or cost increases (or decrease) for special commodities".

Fixed Price Incentive Fee Contract (FPIF)

According to the PMBOK (7th edition) by the

(PMI), Fixed Price Incentive Fee Contract (FPIF) is a "type of contract where the buyer pays the seller a set amount (as defined by the contract), and the seller can earn an additional amount if the seller meets the defined performance criteria".

Usage

US government procurement policy strongly favours use of fixed-price contracts,Frick, D. E.
Risk in Fixed-Price Contracts
''Defense AT&L'', November-December 2013, accessed 16 January 2024 although Federal Acquisition Regulations do outline when they are "suitable" and the necessary basis on which "fair and reasonable prices" can be determined. They are suitable, in particular, for the supply of products available commercially. Fixed-price contracts are often used by

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

and

government A government is the system or group of people governing an organized community, generally a State (polity), state. In the case of its broad associative definition, government normally consists of legislature, executive (government), execu ...

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 ...

Examples

Aerospace manufacturing

A400M transport aircraft

Airbus Airbus SE ( ; ; ; ) is a Pan-European aerospace corporation. The company's primary business is the design and manufacturing of commercial aircraft but it also has separate Airbus Defence and Space, defence and space and Airbus Helicopters, he ...

's German chief executive Tom Enders indicated that the fixed-price contract for the A400M transport aircraft was a disaster based on naivety, excessive enthusiasm and arrogance, stating, "If you had offered it to an American defence contractor 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 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 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 United States federal executive departments, executive department of the federal government of the United States, U.S. federal government charged with coordinating and superv ...

history. Rather than saving costs, the new type of aircraft was projected to consume 70 percent of the U.S. Navy's aircraft budget within three years.

KC-46 Pegasus

The U.S. Boeing KC-46 Pegasus 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, or simply Boeing (), is an American multinational corporation that designs, manufactures, and sells airplanes, rotorcraft, rockets, satellites, and missiles worldwide. The company also provides leasing and product support s ...

. 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 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

Real estate

In real estate and

, a binder is a temporary contract that fixes the price, subject to the final payment and sale at the closing.

Citations

References

* Allan, B. (2004). Project management. 1st ed. London: Facet. * * {{Contract types Contract law Procurement Business terms Pricing