Fixed-price contract

What is a fixed-price contract?

A fixed-price contract is a contract to deliver defined work for one agreed price, with the contractor carrying the cost risk. If the job runs over, the contractor absorbs it; if it runs under, the contractor keeps the difference. The federal acquisition regulation describes the firm-fixed-price type as placing maximum risk and full responsibility for all costs and resulting profit or loss on the contractor.

Why it matters to a revenue leader

Buyers like fixed prices because they make budgets certain, so a fixed-price proposal often beats a T&M quote for the same work. The risk moves to the seller's company, which makes scope definition, site walks and estimating discipline part of the sales job. For a revenue leader, fixed-price work sold on loose scope is where gross margin disappears, and change orders become the only way to recover it. Compare margin at bid with margin at close, by seller and by estimator, to see where scope is slipping.

A fire protection company sells a sprinkler retrofit for a fixed $180,000, with $135,000 of estimated cost, a 25% gross margin. Hidden asbestos adds $20,000 of cost the contract does not cover. Margin falls to about 14% unless the team secures a change order.