What is the difference between fixed-price contracts and cost-reimbursable contracts?

The distinction between fixed-price contracts and cost-reimbursable contracts primarily lies in the pricing structure and the amount of risk assumed by the parties involved. Fixed-price contracts set a price that does not change, regardless of the actual costs incurred during project execution. This provides a clear budget expectation for both parties, ensuring that the contractor must manage their costs effectively to deliver the project within the agreed-upon price. Because the contractor bears the risk of higher costs, it incentivizes them to control expenses and complete the work efficiently.

In contrast, cost-reimbursable contracts allow the contractor to be reimbursed for their actual costs incurred, along with an additional fee that may be fixed or percentage-based. This type of contract transfers more risk to the client, as they are responsible for covering the contractor's costs, which can vary. While this allows for flexibility in project scope and changes, it can also lead to uncertainties in total project expenditure.

Understanding this key aspect of fixed-price contracts helps in choosing the right contract type based on project needs, risk tolerance, and financial considerations.