Definition:
A contract where the contractor agrees to complete the project for a fixed total price, covering all associated costs regardless of any cost overruns.
Key Components:
- Scope Definition: Clearly defined project specifications and deliverables.
- Payment Terms: A single lump sum payment or scheduled payments based on milestones.
- Risk Allocation: Contractor assumes the risk of cost overruns; savings benefit the contractor.
Use Cases/Industries:
- Construction Projects: Building infrastructure with well-defined plans.
- Manufacturing Facilities: Erecting plants where scope is unlikely to change.
Advantages:
- Cost Certainty: Owner knows the total project cost upfront.
- Simplified Management: Reduced need for detailed cost tracking by the owner.
Challenges:
- Limited Flexibility: Changes in scope can lead to renegotiation and additional costs.
- Potential for Quality Issues: Contractors may cut corners to maintain profitability.
Related Terms:
Firm-Fixed-Price Contract, Turnkey Contract
Example:
A company contracts a builder to construct a warehouse for a set price of $2 million, with the builder responsible for any cost overruns.
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Synonyms:
Fixed-Price Contract, Stipulated Sum Contract
