What characterizes a "fixed-price contract"?

A fixed-price contract is characterized by a price that is agreed upon by both parties at the outset and remains unchanged regardless of the costs incurred during contract performance. This means the contractor bears the risk of any cost overruns or inefficiencies that may occur while fulfilling the contract. The fixed nature of the price fosters a clear understanding of the obligations and expectations for both the buyer and the seller, facilitating budgeting and financial planning.

This type of contract is particularly advantageous when the scope and requirements of the work are clear and well-defined, allowing both parties to have a clear understanding of what is expected and what the costs will be. In contrast, other types of contracts, like those where prices fluctuate with market conditions or are based on time and materials, do not provide this level of cost predictability and risk allocation.