How does a fixed-price contract differ from a cost-plus contract?

A fixed-price contract is characterized by a predetermined price for the goods or services being provided, which remains unchanged regardless of the actual costs incurred by the contractor. This means that the contractor assumes the risk of any cost overruns, as they are obligated to deliver the agreed-upon outcomes at the contractually established price.

This structure incentivizes the contractor to control costs and efficiently manage resources since any savings achieved during the execution of the contract go directly to their profit margin. For clients or project owners, fixed-price contracts provide budget certainty, as they can clearly foresee the overall expenditure without the variability that often comes with cost-plus arrangements.

On the other hand, cost-plus contracts reimburse the contractor for their allowable costs and add a fee or profit margin on top, which introduces uncertainty for the client regarding total costs. Such distinctions clarify why the predetermined pricing feature of a fixed-price contract is crucial, making it a reliable option for budget management and risk allocation in contracting scenarios.