Fixed price: Overview, definition, and example
What is fixed price?
A fixed price is a set amount agreed upon in a contract that does not change regardless of fluctuations in costs or market conditions. This price remains constant for the duration of the agreement or project, regardless of how expenses, materials, or labor costs might vary. Fixed-price contracts are common in industries like construction, manufacturing, and service agreements, where the price is predetermined and agreed upon by both parties.
For example, if a company signs a fixed-price contract to build a house, the price they agree to at the start will not change, even if the cost of materials rises or unforeseen problems arise during construction.
Why is fixed price important?
Fixed price is important because it provides certainty for both the buyer and the seller. The buyer knows exactly what they will be paying, and the seller is guaranteed that amount for the work or services provided, regardless of any changes in costs. This can be especially beneficial in projects with clear, well-defined scopes and deliverables, as it minimizes the risk for both parties.
For businesses, a fixed price contract simplifies budgeting and forecasting since there is a clear, predictable cost. For contractors or service providers, it can be a good way to ensure that they are paid a certain amount for their work, though they must manage the risk of increased costs on their end.
Understanding fixed price through an example
Imagine a business hires a marketing agency to run a year-long advertising campaign. The two parties agree on a fixed price of $100,000 for the campaign, covering all costs related to strategy development, media buying, and creative work. Even if the media costs increase or the agency faces unexpected expenses, the business will still pay the agreed-upon $100,000 at the end of the project.
In another example, a contractor is hired to build a commercial building for a fixed price of $2 million. Despite any potential challenges, such as delays or price hikes in construction materials, the contractor will complete the project for the agreed-upon price, with no additional cost to the client unless specified exceptions are included in the contract.
An example of a fixed price clause
Here’s how a fixed price clause might appear in a contract:
“The total price for the services provided under this Agreement shall be a fixed price of $50,000, payable in installments as outlined in Section 4. This amount will not be subject to adjustment for any reason, except as specified in the contract for additional services or changes in the scope of work.”
Conclusion
A fixed price is an agreed-upon amount for goods or services that remains unchanged during the course of a contract, providing certainty and predictability for both parties. It’s a popular arrangement in industries where the scope of work is clearly defined, and there is less likelihood of unexpected changes in costs. For businesses and service providers, fixed price contracts can offer financial clarity and reduce the risk of unforeseen costs.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.