What are the key differences between fixed-price and cost-reimbursement contracts?

A fixed price contract is NOT a lump sum contract, it is in fact a contract that has no price adjustment mechanism for inflation. It is effectively the rates and prices that are fixed, not the total of the prices. A lump sum contract can be variable (i.e. it has a price adjustment mechanism), in the same way that a cost reimbursable contract can be fixed (i.e. it has no price adjustment mechanism). There is a distinct and crucial difference between fixed/variable and lump sum/remeasurable/cost reimbursable - the former considers adjustments for inflation, the latter considers the method of reimbursement.

One unusual tip for fixed-price contracts is to include a contingency clause. This clause allows for adjustments to the contract in case of unforeseen events or changes in scope that may require additional resources or funding. It provides flexibility and helps mitigate conflicts by setting clear conditions for when the clause can be activated. By including a contingency clause, both parties can navigate unexpected challenges without jeopardizing the project's success.

Derek Byrne - Fixed Term does not prescribe the fixity of the terms and conditions - “Term” refers to duration… a fixed term contract or term service contract is the provision of a set service for a defined period of time. However, notwithstanding that differentiation, the terms and conditions ARE very much fixed in a contract, that is the underlying principle, and they can only be varied by the parties to the contract and only by mutual agreement. “Variations”, Compensation Events and other such change events, do not in themselves change the terms - in fact it is the terms and conditions (i.e. the contract) that prescribes how such changes are dealt with……

A fixed-Price Contract is based on the information at tender stage, should the conditions change then the contractor will seek recovery of any additional cost as this will not be covered in the original fixed price. A fixed price contract is good for simple, well defined scopes of work with little chance of any variances and for short periods of time, where there is low risk of escalation , additional time risk with a well defined scope.

Benefits of fixed price contracts can be very useful usage in construction, where we wnat to have results, other benefits is that it helps or put most responsibilities on contractor.

One thing to consider is an incentivized cost reimbursement contract where the contractor receives incentive profit and/or bonus based on productivity and loses profit and/or bonus based on poor productivity.

Establish a transparent cost-tracking and reporting system. This ensures accurate monitoring of expenses and promotes accountability between the buyer and contractor. Regular reporting, cost audits, and clear change control procedures help maintain transparency and prevent unexpected cost overruns.

One way to improve these contracts (to protect buyer against excessive costs and provide incentives for contractors to be more efficient) is to use a cost-plus-incentive contract. This type of contracts provides a higher fee when the contractor keeps costs down or meets the project deadline without delay. It includes a target cost and fee, minimum and maximum fee, and a formula by which the fee is to be adjusted.

It works well in some scenarios. However, there is need to hedge against a free fall as per cost. Otherwise the contract might be abandoned by the owner. Thereby fixing a limit to variation from the based cost determined by market rates.

Consider using milestone-based payments. This approach allows for incremental compensation as specific project milestones are achieved, providing financial stability for the contractor and allowing the buyer to assess progress before releasing payment.

To ensure the success, the following securities in the contract: - Cost ceilings: A maximum amount of money that the contractor can spend to ensure the project stays within budget. - Incentives: Additional payments or rewards to encourage the contractor to meet milestones or complete the project ahead of schedule. - Reporting requirements: Regular traceable reports on the project's progress to keep you informed. - Performance milestones: Clearly defined milestones with a value to be determined internally or a +/- % over the awarded contract/agreement. My View..

I agree with the other contributors comments. The only thing I might add is that, retaining a percentage of the full contract price till the completed project has been accepted, can add additional incentive for better quality and on-time performance, particularly with construction projects.

One dis advantage of the fixed price contract is that it can't be audited and sponsors will less control over it. Other disadvantages is more expensive. Advantage is less responsibilities on sponsors.

In construction, fixed price contracts are the standard subcontract UNLESS you have a cost-plus contract with the owner, then you can pass the variable price costs to the owner.

Consider implementing a performance-based incentive structure. This encourages contractors to excel, aligns interests, and drives optimal project outcomes.

When you have both Owner and the Contractor steering the ship at the same time, you create turbulence that always ends up costing the Owner more money. Also, because the contractor has less risk, he is unlikely to dedicate his most talented team to the project. He will put these folks on the Lump Sum project where he can actually lose money. One of the things that is incumbent on the Owner in this type of contract is to understand and estimate the unknown / unreleased portion of the scope to assure there is a reasonable cost forecast.

Consider a hybrid contract. A hybrid contract combines elements of both fixed-price and cost-reimbursement contracts, allowing for a more tailored approach to meet specific project requirements. This flexibility enables you to allocate risk, control, and compensation in a manner that aligns with the unique characteristics of your project.

When we are planning of procurement and analyzing our portfolio needs that's the time to chose best instrument, and having market research or information.

Yes contingency clauses are important in all contracts for several things like material costs spiking or weather delays. Change orders are very important in both contracts as well. It is a mistake to think that cost plus contracts don’t require change orders. It can quickly come back to burn you.