Fixed-price, also known as a lump-sum or stipulated-sum, refers to a contractual arrangement where the agreed-upon price for a product, service, or project remains constant regardless of unforeseen fluctuations in costs or scope, except as explicitly outlined in the contract's change order process. This pricing model offers predictability for the buyer and shifts most of the cost risk onto the seller. Successful execution necessitates accurate initial estimations, well-defined project scope, and effective cost control measures on the seller's part to maintain profitability within the pre-established budget. It contrasts with cost-plus or time-and-materials models, where the final price is determined by actual expenses incurred.
Fixed-price meaning with examples
- The construction company secured the contract under a fixed-price agreement for the new office building. This meant, regardless of rising material costs or unexpected labor shortages, the building's final price remained the same, providing the client with budget certainty. The contract was very detailed, and scope changes were documented, and it shielded the client from overruns if the construction firm managed the project efficiently.
- For the software development project, the client chose a fixed-price contract. The developers delivered the application within the agreed budget, although the project scope and requirements shifted several times through development. Although the client and the developer struggled, the fixed price remained throughout the project duration, ensuring the client had the necessary resources and the ability to control their budget.
- The artist offered her portrait services with a fixed-price. This means the client paid a set fee for the completed painting regardless of the time it took the artist or the materials utilized. The agreement provided the client with a straightforward understanding of the investment and permitted the artist to manage their schedule efficiently, by giving the client a predetermined set time.
- When buying a new car, you're typically offered a fixed-price. This allows the car buyer to confidently negotiate financing and other add-ons, since the cost of the car itself is known upfront. The buyer can see the sticker and know the car's fixed price, even if they choose additional services; for instance, if it's a new car or a used car, the car's value remains constant.