A fixed-price contract is a type of contract such that the payment amount does not depend on resources used or time expended by the contractor. This is opposed to a cost-plus contract, which is intended to cover the costs incurred by the contractor plus an additional amount for profit. Such a scheme is often used by military and government contractors to require vendors to incur the risk of cost overruns, and to control costs. However, historically when such contracts are used for innovative new projects with untested or undeveloped technologies (such as new military transports or stealth attack airplanes), it often results in failure if costs greatly exceed the ability of the contractor to absorb unexpected cost overruns.
Fixed prices can require more time, in advance, for sellers to determine the price of each item. However, the fixed-price items can each be purchased faster, but bargaining could set the price for an entire set of items being purchased, reducing the time for bulk purchases. Also, fixed-price items can help in pre-determining the value of an inventory, such as for insurance estimates.
Such contracts continue to be popular despite a history of failed or troubled projects, although they tend to work when costs are well known in advance. Some laws mandate a preference for fixed-price contracts, however, many people maintain that such contracts are actually the most expensive, especially when the risks or costs are unknown in advance.
The United States' Federal Acquisition Regulation (FAR) provides for the following types of contract with a fixed price element:
Economic price adjustment may take account of increases or decreases from an established and agreed-upon price level, actual costs or a price index.
Airbus's German chief executive Tom Enders indicated that the fixed-price contract for the A400M transport aircraft was a disaster based on naivety, excessive enthusiasm and arrogance, stating, "If you had offered it to an American defence contractor like Northrop, they would have run a mile from it". He stated that unless the contract was renegotiated, the project must be abandoned.
The U.S. A-12 Avenger II aircraft development contract was a fixed-price incentive contract, not a fixed-price contract, with a target price of $4.38 billion and ceiling price of $4.84 billion. It was for a unique, stealthy, flying wing design. On 7 January 1991, the Secretary of Defense canceled the program. It was the largest contract termination in United States Department of Defense history. Rather than saving costs, the new type of aircraft was projected to consume 70 percent of the U.S. Navy's aircraft budget within three years.
The U.S. Boeing KC-46 Pegasus contract was a fixed price contract. Due to its history of cost overruns, it is an example of how fixed price contracts place the risk upon the vendor, in this case Boeing. Total cost overruns for this aircraft have totaled about $1.9 billion. However, Boeing was able to absorb those costs and has gained US Air Force approval to begin producing the KC-46.
The Canadian Construction Documents Committee's "Stipulated Price Contract" (CCDC-2), revised in February 2008, provides for a property owner and prime contractor to agree that work is done for a fixed price or lump sum.