What Is a Fixed-Price Contract
A fixed-price contract sets the terms of a project and establishes the price of goods or services. It outlines exactly what the seller is required to do and the seller’s obligations for a firm price. Fixed-price contracts are especially useful when a project’s scope is easily determined from the beginning. A fixed-price contract gives each party certainty as to what will occur, without the need for conditional contract language.
When you handle voluminous fixed-price contracts, you want to ensure their terms are uniform but easily modifiable. You want to effectively track them in a contract management system that provides you personalized metrics to increase your company’s success. With effective contract management software, you can easily modify, track, and utilize fixed-price contracts in your business.
What is a fixed-price contract?
A fixed-price contract is a contractual agreement with a predetermined value for the goods or services provided. The price of the project does not change and is not based on conditional language in the agreement. The contract may even keep this previously set price when the cost of materials, the amount of time needed for the service increases, or other factors have changed. It provides the buyer security in knowing what they will have to pay, rather than an estimate.
Fixed-price contracts are also commonly known as:
- Lump-sum contracts
- Fixed-sum contracts
- Fixed-price agreements
- Fixed-price procurement contracts
Examples of a fixed-price contract
Fixed-price contracts are commonly used for the procurement of specific goods or limited-scope services. Common business examples include, but are far from limited to:
- The purchase of inventory or office supplies for a specific price
- The purchase of a vehicle or contract for vehicle repairs
- Hiring an advertising agency to create a logo for a set price
- Paying a company $4,000 to design a website.
With these examples, the price is the same, regardless of any other situation. This is the classic fixed-price contract.
The purpose of a fixed-price contract
The purpose of a fixed-price contract is to create agreements that set a firm price for the goods or services provided. These are most useful in situations where the price is clearly ascertainable and the risk of cost overruns is minimal. They simplify the process of contracting and reduce the potential changes that may occur in more complex agreements.
A fixed-price contract provides certainty to both parties. They are easier to administer and require less labor or materials tracking than other types of agreements. This type of contract also gives the seller an incentive to manage the costs and schedule to minimize their risk of losing money on the deal. This incentive can benefit all parties to the agreement and provide each business peace of mind about cost expectations.
When do I need a fixed-price contract?
You need a fixed-price contract when you can ascertain the costs of the transaction with relative confidence. They provide many benefits, such as:
- Encompass fewer products or services
- Have limited performance duties and uncertainties
- Are easier to administer and control
- Allow for easier budgeting
- Make pre-plan inventory easier
A fixed-price contract is easy to both understand and fulfill. Both parties know what they are getting into and can easily manage the transaction.
Parts of a fixed-price contract
A fixed-price contract may be customized to fit your individual needs, but certain parts of the agreement are common. These common core elements may be essential to an enforceable fixed-price contract:
Identification and scope of goods or services
A fixed-price contract is meant for a limited set of goods or a specific service. It should define what goods will be purchased or what services are to be performed. The specific goods/services and the scope of the project should be outlined in detail. For a firm fixed-price contract, these terms should not be conditioned on anything but the completion of the agreement. Other fixed-price contracts that allow for price adjustments should refer to those conditional agreements.
Price and payment
The agreement should state the specific price for the transaction. This should include not only the amount that will be paid, but also when it will be paid and how. This may include direct deposit information, requirements for a check, or details about a company’s invoicing procedures.
Terms of the agreement
The contract should state how long the agreement is to last. For most fixed-price contracts, this is the date by which services must be completed or goods rendered. It will usually terminate the rest of the contract automatically once the conditions are fully met. More complex fixed-price contracts may set specific conditions—rather than a particular date—that end the term of the agreement.
Breach of contract clause
The fixed-price agreement should outline what will happen if either party breaches the contract. This may include in what jurisdiction a lawsuit may occur, arbitration clauses, or even liquidated damages provisions.
A liability limitations provision gives the parties certain protections in case of unforeseen events. This may protect the seller from a breach if they are truly unable to provide the good or service, or a buyer who is unable to comply through no fault of their own.
Warranty information or disclaimers
If a product comes with a warranty of any kind, the contract should outline what the warranty offers. If the company does not wish to offer a warranty, it should include a disclaimer that clearly states that a warranty—express or implied—is not included as part of the transaction.
Especially in product purchase agreements, the contract should outline whether the goods may be returned. If they may be returned, the contract should outline how and when the seller will accept the goods back.
Limitations of a fixed-price contract
A fixed-price contract comes with certain risks. The seller especially takes on any unforeseen obstacles that may arise with the project. If the costs of the goods significantly increase, or the time it takes to complete the service is much longer than expected, the seller could be forced to take on that additional cost. Fixed-price contracts typically do not account for these unforeseen circumstances. The seller will have to meet the terms of the agreement, often regardless of the unexpected changes.
A fixed-price contract requires a situation in which accurate estimates are possible. If not, their limitations may outweigh their benefits. The same is true if you foresee the likelihood of changes as the transaction occurs. If you know you will need to account for unforeseen issues, a fixed-price contract may not be the right choice.
How to create a fixed-price contract
Your business can create fixed-price contracts by utilizing contract management software. This software lets you create and manage these agreements throughout the contract lifecycle process. You can create form agreements that standardize your fixed-price contracts—agreements that are also easily modifiable when the situation requires changes.
An advanced CLM software takes you from manual, black-box contracts to automated, data-rich contracting and permits contract self-service for fixed-price agreements.
Managing fixed-price contracts
Your company can use automated tools that make it simple to manage fixed-price contracts. The tools provided by the Ironclad software let you integrate it with your existing systems to easily track fixed-price contracts. The software can analyze contract metrics for each agreement and provide you personalized advice on how to streamline your contract lifecycle management.
Ironclad’s software also gives you the ability to maintain the agreements in one system so their data can be analyzed. The Dynamic Repository can help you analyze information like:
- Contract terms and prices
- Start and end dates
- Fixed-price contract templates
- Workflow suggestions
- Renewal dates
- Automation suggestions
- Party identification
These data points and countless others are automatically tracked by the system to make your life easier and increase your revenue by saving time and effort.
Why fixed-price contracts can be time-consuming and hard to keep track of
Fixed-price contracts are meant to be simple contracts, but in old-school systems, they must be reinvented from scratch. This is time-consuming and a waste of valuable employee effort. Instead, a template agreement you can easily modify saves time, money, and stress.
Automating workflows for fixed-price contracts
The Ironclad Workflow Designer gives you the power to automate your fixed-price contracts. It will streamline your process of creating and managing them.
How templatable workflows can help simplify the process
Templateable workflows ensure that your fixed-price contracts meet legal requirements but without significant manual review. Instead, you can simplify the process with a template from which you can build.
Why fixed-price contracts are hard to manage
Fixed-price contracts are hard to manage when they are kept in antiquated storage methods or difficult-to-use software. The systems do not speak with each other, making it difficult to locate individual agreements. This lack of transparency eats into your valuable time—time that could be better spent elsewhere.
The solution to your fixed-price contract needs
Why use digital contract management for fixed-price contracts?
Fixed-price contracts should be simple to use and manage. The thing is, if you are using antiquated contract management systems, they are anything but easy to manage. Automation and templating put you in control and let you manage fixed-price agreements at every stage.
Try a free demo of Ironclad today to start automating your fixed-price contracts.
Table of contents
- What is a fixed-price contract?
- Examples of a fixed-price contract
- The purpose of a fixed-price contract
- When do I need a fixed-price contract?
- Parts of a fixed-price contract
- Limitations of a fixed-price contract
- How to create a fixed-price contract
- Managing fixed-price contracts
- The solution to your fixed-price contract needs
- Why use digital contract management for fixed-price contracts?