How is a fixed-price contract defined?

A fixed-price contract is defined as an agreement where the contractor commits to complete the work for a specific, predetermined price. This type of contract provides both parties with a clear understanding of the financial commitment before the work begins, allowing the contractor to budget and manage resources effectively. Under this arrangement, the risk of any cost overruns typically falls on the contractor, incenting them to complete the project within the agreed-upon price. This stability in pricing can be particularly beneficial for clients, as they can anticipate their total expenditure and avoid unexpected costs.

The nature of a fixed-price contract contrasts with frameworks that allow for changes in costs or project scope, or those that operate on hourly rates, which can lead to variability in total project expenses. Understanding fixed-price contracts is essential for effective contract management and financial planning within the construction industry.