Agreements between a contractor and a client can take several forms. These include a cost-plus contract, in which a client pays the contractor's costs plus a set fee for labor; or a time & materials contract, in which the client pays costs plus an hourly rate for the work. Another type of contract is the fixed-price contract, in which the contractor agrees to do a specified job for a specified price. That means both parties know upfront how much money will change hands. The contractor knows how much it will be paid, and the client knows how much it will have to pay. There are several advantages to a fixed-price contract for both parties.

Requirements

When entering into a fixed-price contract, the client and contractor should agree on detailed, specific requirements for the job as well as a reasonable estimate of costs. In addition, the parties should be able to agree on a delivery time frame for the work and an appropriate price. Finally, the contractor should provide an estimate or bid in advance of the final price agreement.

Advantages for the Contractor

For the contractor or service provider, a fixed-price contract means it will know exactly how much it is to be paid for the job. In addition, the contractor does not have to worry about variable elements, such as the weight of paper stock on a printing job, or haggle with the client over materials costs. These elements and prices are set before the job begins. In addition, while the contractor assumes the risk of higher-than-expected costs, it also does not have to pass along savings if costs prove lower than anticipated. Finally, dealing with fixed-price contracts gives the contractor experience with the type of contract favored by lucrative clients such as the government

Advantages for the Client

Beyond knowing exactly what it will have to pay for the job, the client has one fundamental advantage with a fixed-price contract: Much of the financial risk is placed on the contractor. Once a contract is in place with a firm fixed price, the client is not obligated to pay more to cover higher-than-anticipated costs. In addition, the client can seek bids on the contract that do not include any variables such as an hourly labor charge or substitution of materials. This lets the client compare bids on a level playing field, which should help it get the best possible price in a final agreement.

When "Fixed" Is Not "Firm"

There are two common types of fixed-price contracts. The best-known is called a firm fixed-price contract, in which a client pays one set amount to the contractor, regardless of any other factors such as time or materials. The other is known as an adjustable contract, which contains a fixed maximum price, but allows for a lesser target price. The advantage to the contractor is that it gives him some leeway. He intends to do the job as specified for the target price, but the contract will contain certain clauses that let him increase the price to the ceiling.