Fixed-price contracts

Abstract

A Fixed-Price Contract (also referred to as a lump-sum contract) is a contract where contractors and clients agree to an unchanged set price for a project. (3)

Basic Elements of A Fixed-Price Contract

A fixed-price contract is a contract where the agreed-upon price for the job is unchanged throughout the project. It doesn’t matter if more time, materials or labor must be used than first estimated, the price stays the same.

Therefore, the scope of work the contractor defines in their bid must be very accurate. Once the quote is determined, it is shared with the customer. If the customer agrees with the price for the work, it is cemented as final and no change in man-hours or cost of materials can be considered.

Basic Elements that are included in a Fixed-Price Contract

A Fixed-Price contract has similar components to a contract that outlines work and payment. In general, a fixed-price contract includes the following basic elements

Project Information:

• Owner: The person or organization who is hiring the general contractor for the project.

• General Contractor: The person bidding for the work. They are the overriding contractor, managing the project and any subcontractors and third-party vendors.

• Worksite: The site address for where the construction will take place.

• Scope of Work: Detailing of what the contractor will provide, project plans, schedule, specifications, etc.

• Price and Payment: The total price for the job, which is fixed and unchangeable throughout the project, how and when payments will be made by the customer to the contractor.

Supporting Documents and Costs:

• Documentation: Attach construction drawings, blueprints, exhibits, etc. need to be included in the contract.

• Materials and Labor: List of materials and the labor employed to execute the project.

• Start and End Dates: The schedule, including the starting and completion dates, milestones, and other important dates.

• Licensing and Permits: Who will be responsible for the permits and licenses required for the construction project.

Tasks:

• Subcontractors: Third-party vendors or subcontractors are listed and how they will be incorporated into the project.

• Work Changes: Identify how work change requests are processed throughout the project.

• Warranties: Warranties of the work, the contractor warrants the work and material defects.

Closure:

• Termination: When can the contractor can end the contract.

• Inspection: Inspection of the work to make sure it conforms to their contract.

• Insurance: Insurance obtained by customer and contractor protecting against damage, claims, etc.

• Liquidated Damages: Agreed-upon sum the contractor will pay for each day the project goes over the contracted deadline.

• Force Majeure: Neither party is responsible for events that occur due to circumstances beyond their control, such as weather, supply shortages, Corona, etc.

Types of Fixed-Price Contracts

Governments prefer fixed-price contracts. A fixed-price contract minimizes the risk and maximizes value for taxpayers. With an unchanged set price for the project, the contractor has to control their costs to accomplish the project under budget.

To accommodate different scenarios, there are several different types of fixed-price contracts.

1. Firm Fixed-Price Contracts: Firm fixed-price contracts give the contractor little work change. These contracts are not adjustable, and the contractor must complete the project for the awarded price. The contractor accepts 100% of the profit or loss during the project.

2. Fixed-Price Incentive Contracts: Fixed-price incentive contracts use a formula to determine profit. A fixed-price incentive contract uses the final negotiated price and compares it to the target price to adjust the profit on the project. Every project has a target cost and a target profit, which add up to the target price. Projects also have an actual cost and an actual price. The actual price is the sum of the actual cost and actual profit.

3. Fixed-Price Contracts with Economic Price Adjustment: Fixed-price contracts with economic price adjustment afford the contractor with a bit of an insurance policy. The price can be adjusted up or down according to contract-specific contingencies outside of the contractor’s control. For example, if material costs go through the roof, the contract amount can increase to cover the increased costs.

4. Fixed-Ceiling-Price Contracts with Price Redetermination: There are two types of price redetermination contracts; prospective and retrospective. They both have ceiling prices established at the beginning of the project, which is the most the client is willing to pay for the work. Contracts with prospective redetermination allow for price adjustment at a specified time or times throughout the project’s lifespan, the pricing periods are at least 12 months long. Contracts with retrospective redetermination allow for an adjustment to contract price after the completion of the project. This contract type applies more to research and development contracts than construction.

5. Firm Fixed-Price Level-of-Effort Contracts: Firm fixed-price level-of-effort contracts require the contractor to provide a specified level of effort (labor) for a specified period. The clients pays a stipulated price for this work.

key references

(3-10), where a reader can find additional information on the subject.

References

1. https://www.projectmanager.com/blog/fixed-price-contract

2. https://www.levelset.com/blog/fixed-price-contract/

3. https://www.coconstruct.com/blog/builders-use-fixed-price-construction-contracts-80-of-the-time