A Fixed-Price contract is a type of contract in which the price of the exchange is not subject to any adjustments. In a fixed price contract, the seller and buyer agree to a set price, even if the parties may be able to secure the same goods or services at a lower price in the market.
Fixed price contracts are sometimes called "firm-fixed-price" contracts, or "firm price contracts." These names refer to the fact that the price is generally not subject to change. However, future changes in price can sometimes be accomplished, but only if they are explicitly referred to in a contract clause.
Unless they are a special form of contract (such as a guaranteed maximum contract), most contracts are considered to be fixed-price.
Fixed-price contracts are generally beneficial for agreements where the contract costs can be estimated with a reasonable degree of accuracy and certainty. They also help the parties to establish a basis of trust and security in one another, since the parties will not engage in any further pricing negotiations.
Firm fixed price contracts often help to establish what is called "normal business dealings" between the parties. Normal or "prior business dealings" refers to the fact that each party comes to expect a certain price or agreement from one another. What is Usually Addressed in a Fixed Price Contract?
As mentioned, fixed-price contracts are generally used in instances where the price of a transaction can easily be determined beforehand. In most cases, this involves either:
- The provision of services (also called a "fixed-price service contract")
- The provision of supplies (also called a "fixed-price supply contract")
For example, a business may only need one type of supply that can be provided by a single company over many years. In this case, the business may choose to form a fixed-price supply contract with the supplier, in order to secure a favorable price that won’t fluctuate over time.
Fixed price contracts tend to shift the risk on the supplier, since they may have to agree to a price that won’t change as the market values shift. The supplier will then have greater incentive to be more diligent with cost estimates, so that they can anticipate any risks or losses.
If one party attempts to charge the other party a higher amount than what is stated, it could lead to a breach of contract claim. Or, if one party seeks to continue negotiations after the contract is signed, it could undermine the parties’ sense of trust in one another.
Fixed-price contracts are very specific to each situation, and require an in-depth analysis of various factors. Thus, fixed-price contracts generally require the assistance of a contract lawyer, who can help draft and review the contract. Also, contract laws may vary from state to state, and so the expertise of a lawyer may be needed when dealing with a fixed-price contract. Finally, an attorney can also provide representation in the event that a lawsuit arises over a contract dispute.