If you`re a small business owner who frequently works with government agencies or large corporations, you may have heard the term « firm fixed price contract » thrown around. But what exactly is a firm fixed price contract, and how does it differ from other types of contracts?

Simply put, a firm fixed price contract is a type of contract where the payment amount is fixed and will not change, regardless of any additional costs or unforeseen expenses that may arise during the project.

In this type of contract, the contractor (the party responsible for completing the project) agrees to perform the work for a set price, and the client agrees to pay that price upon the successful completion of the project. Any additional costs or expenses incurred during the project are the responsibility of the contractor and not the client.

One of the biggest advantages of a firm fixed price contract is its predictability. The client knows exactly how much they will be paying for the project, and the contractor knows exactly how much they will be paid. This can help both parties plan and budget accordingly, and avoid any surprises down the line.

However, because the contractor assumes all the risk in this type of contract, they may price their services higher to account for any potential additional costs or unforeseen expenses that may arise during the project. This can make a firm fixed price contract more expensive than other types of contracts, such as cost-plus contracts, where the client pays for all expenses incurred during the project in addition to a fixed fee.

One way to minimize the risk for the contractor in a firm fixed price contract is to include a contingency budget. This is a percentage of the total project cost that is set aside in case of unexpected expenses. For example, if the total project cost is $100,000, the contractor may set aside 10% ($10,000) as a contingency budget in case of unforeseen expenses.

In conclusion, a firm fixed price contract is a type of contract where the payment amount is fixed and will not change, regardless of any additional costs or unforeseen expenses that may arise during the project. While this type of contract provides predictability for both the client and contractor, it can be more expensive than other types of contracts due to the assumption of risk by the contractor.