What Is a Fixed Price Contract?
Introduction
A fixed price contract is one of the most common pricing models used in commercial agreements, construction, IT services, and professional services. It provides cost certainty by locking in a firm price upfront. This means the Client knows exactly what they will pay, and the Supplier is contractually obligated to deliver the agreed scope for that fixed amount.
Fixed price agreements work best when obligations in a contract are well-defined, requirements are stable, and both parties clearly understand their contractual obligations and contractual rights under the agreement.
Definition
A fixed price contract (also called a fixed cost contract, fixed fee contract, fixed sum contract, firm fixed price contract, or fixed-price contract) is a contractual agreement where the Client pays a predetermined amount for the Supplier to deliver a specific set of goods or services.
Simple definition of fixed price contract
A fixed price contract is an agreement where the price remains the same, regardless of the Supplier’s actual costs.
This reflects the definition of fixed price: the amount is set, firm, and does not fluctuate unless a formal change is approved.
Key Terms, Elements, and Clauses
- Scope of Work (SOW)
Defines deliverables, milestones, acceptance criteria, timelines, and duties and obligations of both parties.
- Firm Price Clause
Confirms that prices are firm and cannot be changed unless the Client approves a variation.
- Payment Structure
May include milestone payments, stage payments, or a single fixed sum.
- Change Control Clause
Explains how variations are requested, evaluated, priced, and approved. Important for obligation management and contract rules.
- Risk Allocation
The Supplier carries cost risk because the price is fixed. The Client carries risk if the scope changes.
- Inspection and Acceptance Criteria
Defines how the Client will inspect, test, and accept deliverables.
This is essential for fixed-price deliverables in construction and IT.
- Legal and Contractual Terms
Includes:
- contractual obligations meaning
- definition of contractual obligation
- obligation legal definition
- define contractual obligations
- legally obligated definition
- obligations law and obligation
These terms define what the Supplier is legally required to deliver and what the Client must pay.
Types of Fixed Price Contracts
- Firm Fixed Price (FFP)
Strictest model. No price adjustments are allowed.
- Fixed Price with Incentive Fee (FPIF)
Supplier may earn an incentive for meeting agreed performance or efficiency targets.
- Fixed Price with Economic Price Adjustment (FPEPA)
Allows adjustments for inflation or material price fluctuations.
- Fixed Fee Contract
A flat fee is paid for specific deliverables.
- Fixed Sum or Fixed Cost Contract
Price determined based on total estimated cost.
- Fixed Price Construction Contract
Used for building works where the total construction cost is agreed upfront.
When to Use a Fixed Price Contract
A fixed price agreement is ideal when:
- Scope is clear, stable, and measurable
- Requirements are unlikely to change
- The Supplier can estimate cost accurately
- The Client requires budget certainty
- Deliverables have predictable effort
- Both parties need strong contractual protection and minimal contract issues
This aligns with the meaning of contractual obligation and ensures both parties know exactly what they are contractually obligated to do.
Benefits
- Cost Certainty
The Client knows the total price from the start – crucial for financial obligations and budgeting.
- Reduced Financial Risk for Client
The Supplier carries the risk of overruns.
- Clear Duties and Obligations
The agreement clearly defines contractual rights, legal obligations, and what is contractually required.
- Strong Contractual Protection
Less ambiguity and fewer disputes.
- Simplified Management
The structure is straightforward compared to T&M or cost-plus contracts.
Common Risks
For Clients
- Scope changes can be expensive
- Less flexibility once the price is set
- Quality issues if the Supplier cuts costs
For Suppliers
- Incorrect estimation reduces profitability
- Increases risk if material costs rise
- Requires strict adherence to obligations law and project management
Understanding the meaning of contractual obligation and obligation defined terms helps both parties navigate these risks.
Fixed Price Contract vs Other Pricing Models
Fixed Price vs Firm Fixed Price
Often interchangeable, but a firm fixed price contract is stricter with no adjustments allowed.
Fixed Price vs Time & Materials (T&M)
- Fixed Price: Supplier carries cost risk
- T&M: Client carries cost risk
Fixed Price vs Cost-Plus
- Cost-Plus: Client reimburses actual cost + fee
- Fixed Price: Price is locked, and Supplier absorbs overruns
These comparisons clarify what is a fixed contract and how to define contractually different risk models.
Examples in Different Industries
- Construction
A fixed price construction contract for building a new retail outlet.
- IT Services
A fixed price IT services agreement for building a mobile app or integration module.
- Professional Services
A legal team charging a flat rate fee for contract drafting.
- Manufacturing
A fixed price agreement for producing components at a set unit cost.
- Public Sector Procurement
A firm fixed price project managed by a Client representative ensuring compliance.
These scenarios demonstrate obligations and contracts in real-world industries, including financial obligation definitions and examples of obligations in a contract.
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Managing Fixed Price Contracts with Contract Corridor
Contract Corridor helps all Parties manage fixed price agreements more effectively through:
- Standard Templates
Pre-built fixed price contract samples, pricing contract templates, and fixed price agreement sample structures.
- Obligation Management
Track contractual obligations, obligations in a contract, financial obligations, and legal obligation means – automatically.
- Change Management & Approvals
Control changes to the fixed sum and avoid scope creep.
- Centralised Repository
Store:
- fixed price agreements
- fixed price contract samples
- firm fixed price documentation
- fixed cost contract examples
- Real-Time Dashboards
Monitor what the Supplier is contractually obligated to deliver, obligations legales, and obligation terminology across the portfolio.
- Risk & Compliance Alerts
Identify contract issues early and protect both Client and Supplier with strong contractual protection and obligation management.
Contract Corridor ensures every fixed-price contract – from construction to IT to professional services – is executed with clarity, compliance, and control.
Ensure cost certainty and strong contractual protection with fixed price contracts, Schedule a Demo