What is a fixed-price contract?

A fixed-price contract is defined as a contract where the payment amount is established and agreed upon in advance, providing a clear financial structure for both parties involved. This type of contract designates a specific price for the deliverables or services being provided, which does not change regardless of the actual costs incurred by the contractor. This can offer benefits such as predictability and reduced financial risk for the buyer, who knows exactly what will be paid. Since the price is predetermined, it incentivizes the contractor to manage costs effectively and complete the project within the specified budget.

Other options describe different types of contracts. For instance, a contract based on actual costs incurred plus a fee is typically a cost-reimbursement contract, which allows for payments that cover the costs plus additional profit, diverging from the fixed financial commitment of a fixed-price arrangement. Price adjustments after evaluation are characteristic of contracts such as those with economic price adjustments, which can change prices based on specific criteria. Lastly, the notion that a fixed-price contract is exclusively for long-term projects is inaccurate, as such contracts can be utilized for various project durations, from short-term to long-term engagements.