Fixed-Price or Lump Sum Contract

The term firm fixed price or lump sum contract refers specifically to a type or variety of fixed price contract where the buyer or purchaser pays the seller or provider a fixed total amount for a very well-defined product, however there is the allowance within these for a variance in the event there are incentives attained through project incentives achieved or targets met. There are benefits of this type of contract to both the buyer and the seller, and these are similar to those for the fixed price incentive fee contract. To the seller, it is beneficial because it typically allows for the seller or provider to charge a reasonable base fee, yet also allows for exceptional performance to be rewarded further. However, for the buyer that also provides a very tangible benefit. The buyer typically will be paying a very reasonable base fee up front, but there is of course the chance that the price will go up in the future if certain conditions are met.

This term is defined in the 3rd edition of the PMBOK but not in the 4th.

2 thoughts on “Fixed-Price or Lump Sum Contract

  1. Depends on whether you are the seller or the buyer and also on the payment terms. Ideally, you would agree on payments for milestones after a major deliverable has been accepted so that the seller has cash coming in and the buyer is assured that the deliverables are met. Lump sum may have the disadvantage for the seller that cost for external resources rise whereas the lump sum stays the same.

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