- Such contracts are often criticized because they have a little formal incentive for the contractor to control expenses, as they are paid regardless of the final price. Moreover, the final cost of such a contract is not guaranteed. In addition, there is a problem with a limited number of contractors with the necessary knowledge and experience.
- By agreement with a fixed price, the contractor undertakes to perform all work specified in the contract at a set price. Clients can get the lowest price by placing an agreement for bidding. If the project’s scope is well defined, the costs are predictable, and the implementation risks are low, both owners and constructors will favor a fixed-price contract (Symes, 2019). Contractors also prefer these agreements because there is less chance that the client will require changes or additions to the deal. Minor potential modifications reduce project uncertainty and allow contractors to manage their resources more efficiently across multiple projects.
- For the contractor, the main disadvantage of a fixed-price contract is that it runs the risk of underestimating the contract. If serious problems arise with the project, the excess of the cost can lead to the unprofitability of the project. To avoid this, the contractor must invest heavily to ensure the accuracy of their estimate. In contrast to fixed contracts, when concluding a contract with cost-reimbursement contracts, all risks are borne by the client. The agreement does not specify the price of the project until the end of its implementation.
- World practice suggests organizing tenders for the right to be a supplier to stimulate normal competition. The latter activates the development of scientific and technological progress, stimulates producers to be sensitive to changes in consumer demand, and limits powerful firms’ influence.
References
Symes, S. (2019). Advantages & disadvantages of a fixed-price contract. Chron. Web.