Define Fixed-Price Agreement

There are many advantages in using a fixed-price contract in the construction industry. One of the main reasons why it is so often used is its simplicity – companies are willing to pay a higher price upfront to avoid them dealing with permanent hourly or daily billing contracts and material costs. Both the company and the contractor know in advance the exact costs of the commercial construction, which encourages the contractors to ensure accuracy during the tendering procedure. In some projects, it is difficult to predict the extent of the work required. This may result from uncertainties about the time and material required, or the client may want flexibility to complete the services after the completion of the first job. In these cases, an agreement on fixed prices is less sensible, as it carries more risk for the contractor. The supplier does not want to take the risk of investing extra hours and costs in a project, so they make little or no profit from the work. The others are hourly and material-based billing or a firm agreement with built-in flexibility and a price range agreed between the two parties. The Federal Acquisition Regulation (FAR) defines it as “a fixed-price contract provides a price that is not subject to any adjustment based on the contractor`s experience of costs during the performance of the contract.

This type of contract presents the contractor with the maximum risk and full responsibility for all costs and the resulting profits or losses (FAR 16.202-1). If you enter into a fixed-price contract, you agree in advance on the final cost of a good or service. This price is written into a contract that both parties sign and that both parties undertake to respect. The duration of the fixed price depends on the contractual conditions. Balancing the pros and cons of a fixed-price contract helps a small business decide whether to exercise the option. Fixed-price contracts may be inflexible or determine the circumstances in which adjustments can be made. In a fixed price contract (FFP), the products or services must be delivered on the agreed date and payment must be made in accordance with the agreement.. . .


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