HKSM

A contract where a single, fixed price is agreed for a clearly defined scope of work, and payment stays the same regardless of the actual costs or effort required to deliver it.

Key Points

• Price is set upfront and does not change with the seller's actual costs or effort.
• Best suited when scope, specifications, and deliverables are stable and well-defined.
• Cost overrun risk is largely on the seller; the buyer gains predictable total cost.
• Scope changes require formal change control and may lead to a negotiated price adjustment.

Example

A company hires a vendor to build a website for a fixed price of $120,000 based on a detailed requirements document. Even if the vendor spends more time or money than planned, the buyer still pays $120,000 unless an approved change request modifies the scope and price.

PMP Example Question

Which contract type provides the buyer with the greatest cost certainty while placing most cost risk on the seller for a well-defined scope?

1. Time and Materials (T&M)
2. Fixed-Price
3. Cost-Plus-Fixed-Fee (CPFF)
4. Cost-Plus-Incentive-Fee (CPIF)

Correct Answer: B — Fixed-Price Contract

Explanation: In a fixed-price contract, the total price is set for a defined scope, giving the buyer cost predictability while the seller bears the risk of cost overruns.