A fixed-price contract is a type of contract in project management wherein the payment does not depend on the resources or the time spent. It involves setting fixed price for the product, service or result defined in the contract.
This particular type of contract can also include monetary incentives given to the seller who has exceeded the project objectives. Such project objectives include the schedule dates of delivery, technical performance and anything that can be measured by the project managers.
This means that the seller has agreed to deliver work for a fixed amount of money. This type of contract is often used by government contractors to control the cost and put the risk on the vendor’s side. Thus, sellers who follow the fixed-price contracts have legal obligations to complete the contract otherwise they have to incur financial liabilities if they cannot deliver. Under this arrangement, the buyers should specific the types of products or services that they provide so that the buyer can set a particular fixed price to the deliverables.
The advantage of using this type of contract is that it allows the customers to correct any mistake during the initial phase. Moreover, the seller is also billed more than the budgeted cost so they can easily earn more with this contract. However, this type of contract also comes with several disadvantages which include the change requests disrupting the flow and order of the project. Moreover, it can also lead to the dissatisfaction on the customer.
It is crucial for the contract to state the responsibilities of both the buyer and seller. These include information on the delivery date, testing feedback and following the quality criteria. The contract improves the working relationship between the buyer and seller.
This term is defined in the 5th edition of the PMBOK.