What Is a Fixed Price Contract in Project Management? Everything You Need to Know

Pricing your services can be a headache, right?

You want to be fair to your clients but must keep your business profitable.

That’s where fixed-price contracts come in. They sound simple enough—you agree on a price upfront, do the work, and get paid.

Easy, right?

Well, not always. Sure, fixed-price contracts can give you and your clients peace of mind. But they can be a double-edged sword.

What happens when a project spirals out of control or takes longer than you estimated? Suddenly, that “fair” price doesn’t look so good anymore.

But don’t worry—we’ve got your back.

In this article, we’ll explain everything you need to know about fixed-price contracts. We’ll show you how to use them to your advantage and avoid the common pitfalls.

By the end, you’ll be equipped to price your services like a pro, keeping your clients and bank account happy.

What is a fixed-price contract?

A fixed-price contract (FPC) is a type of contract in which both parties negotiate and agree to a set fee for all project deliverables. 

Fixed-price contracts are ideal for projects with a clear scope, making budgeting easier for both parties. This is unlike cost-plus contracts, where clients cover all deliverable and expense costs. 

A fixed-price contract also differs from a time and materials contract, where the employer pays the contractor for any billable hours and materials used to complete a project. In a fixed-price contract:

• A change in the scope of work can only happen with a price  renegotiation
• The total price is agreed upon before work starts
• Payment is made as each deliverable is completed

Fixed-price and time and materials contracts are among the most common types. Let’s compare them to understand their differences.  

Time and materials contract vs. fixed-price contract

A fixed-price contract covers all the details and deliverables of a project, so there isn’t much (if any) wiggle room for changes. A time and materials contract is more flexible for a project’s evolution.

Let’s check out the main differences between time and materials and fixed-fee contracts 👇

Time and materials	Fixed-price
Flexible and adaptable terms	Strict and fixed terms
More client involvement	Less client involvement
Higher risk of going over budget	Lower risk of going over budget
Uncertain timeframe and requirements	Requirements and timeframe are always clear
Little control over cost	Fixed cost
Tends to be less expensive in the long run	Cost can be higher than other contract types

What is the purpose of a fixed-price contract?

Contractors and clients sign fixed-price contracts to set a predetermined budget for a project.

While material costs and other resources can fluctuate throughout a project’s lifecycle, a fixed-price contract ensures neither party can back out of the agreement—regardless of variables.

The main benefit of a fixed-price contract is clarity. 

It simplifies the billing process as costs are decided early. Both parties can focus on completing the project while maintaining a transparent business relationship.

What are the different types of fixed-price contracts?

In project management, the three main types of fixed-price contracts are:

Firm fixed-price	Fixed-price incentive fee	Fixed-price with economic price adjustment
Price is fixed throughout the project’s duration.	Price is fixed for the duration but includes an incentive for faster delivery or high-quality work	Price is fixed but allows some flexibility (at a predetermined rate) for market volatility.

Let’s break them down a little more 👇

Firm fixed-price contract (FFP)

In firm-fixed-price contracts, the project price is set at the start. This fee remains unchanged, regardless of project duration or cost changes during execution.  

This poses more risk to the contractor.

For example, a company may hire a freelance developer to build a website for $50,000. The developer assumes all the risks in case of a delay or hike in resource costs.

Fixed-price incentive fee contract (FPIF)

Fixed-price incentive contracts (FPIF) reward contractors with a performance bonus. For example, a contractor may earn extra by delivering the project before the deadline. Such bonuses are mentioned in the contract along with the fixed fee.   

Suppose a SaaS company contracts a marketing agency to prepare a go-to-market strategy for $10,000. The company might add a reward fee of $1,000 if the strategy is ready within two weeks instead of a month. This extra bonus turns the contract into an FPIF. 

Fixed-price with economic price adjustment contract (FP-EPA)

An FP-EPA begins with a set price but allows pre-agreed adjustments based on specific criteria, such as market conditions.  

The criteria are usually beyond either party’s control, such as an unexpected rise in the cost of materials and labor. This makes it ideal for long-term projects where uncertainties can impact final costs. 

For example, a state government may hire a construction agency for a two-year project. The agency asks the government to sign an FP-EPA contract that stipulates a 10% adjustment to factor in fluctuations in labor and material expenses.

What are the advantages of fixed-price contracts?

Fixed-price contracts provide clarity for both parties bound to them. They also have a few other benefits.

Predictable cost & reduced financial risk for clients

Clients opt for fixed-price contracts because they get to know the total cost upfront. They can determine if the project is a good fit for their budget. This saves them from additional costs that may pop up during the project’s timeframe.

Knowing they will bear any overruns, the contractor usually gives a good estimate before commencing the project.

Clear project scope and deliverables

Both parties know what to expect upon completing the project, preventing disputes and conflicts.

Let’s look at the example of the company hiring a website developer. A template for the project scope would include:

• Objective: To design a functional website
• Deliverables: Custom website design, payment gateway integration, mobile responsiveness, SEO optimization, etc.
• Timeline: Within 2 months.

This reduces ambiguity and improves the contract management experience for all stakeholders involved. 

Incentive for efficient project delivery

A fixed-price contract motivates contractors to be more efficient with their time. 

Contractors are paid according to results, not time spent on the project. That means they are paid the same amount whether the task takes an hour or five, which incentivizes them to finish in the shortest time frame.

Plus, the faster the tasks are finished, the more contractors can fit into their workday, increasing revenue.

Hourly contracts, on the other hand, can be less efficient if unscrupulous freelancers take their time completing their tasks so they can charge more. 

Simple & straightforward terms

Fixed-price contracts are easy to draft and agree to. The scope is clearer, the final fee specific, and the deliverables well-stated.

The paperwork is simple and easy to understand, and the freelancer isn’t tasked with tracking expenses as the project develops.

Price comparison between vendors

Provided everything is clear on the client’s side, they can contact more potential vendors and ask for proposals. This makes evaluating the price factor easier and choosing a vendor with the best proposal.

When should I use a fixed-price contract?

Fixed-price contracts will probably be a good fit if your project has:

• A well-defined project scope
• Shorter duration: 
• Clear deliverables
• Budget certainty

If you sign a fixed-price contract with a client, it’s critical to remember any extra costs will chew into your profit margins. So, keeping a close eye on costs once work starts is key. 

Toggl Track is useful for managing and monitoring fixed-price contracts. Its Fixed Fee feature allows you to set a project price, monitor progress against budget, and ensure the project stays profitable.  

What are the disadvantages of fixed-price contracts?

Fixed-price contracts don’t always favor both parties and disadvantages and potential drawbacks are involved. Let’s take a look 👇

Possible risks for the service provider

The service provider or contractor bears the burden of risk. Should the actual execution costs exceed the initial estimates, the contractor cannot renegotiate the price or step back from the agreement.

Such risks can be due to a poor market survey before offering a final price or unforeseen challenges, particularly if subcontractors are involved.

This can hamper the contractor’s profitability and the quality of service delivered.

Approval & communication challenges

Delays in feedback can derail a project’s schedule and make it unprofitable.

For example, a web design agency may wait for the client to approve the website design before starting development. If the client fails to approve the design on time, it affects the project timeline and the agency’s resource plans.

As a result, not only does the current project become unprofitable, but also affects other projects.  

Potential for disputes over scope creep

In fixed-price projects, you need a clear process to handle changes. 

For example, a client might request extra app features, or an organization might realize it needs social media support alongside its marketing strategy.

These scope changes can lead to payment disputes if not appropriately addressed.

To prevent this, include a change management process in your contract. This typically involves:

• Identify the changes
• Assess the associated costs and who will bear them
• Get approval from both parties
• Once approved, adjust the contract price accordingly

This approach helps maintain fairness and prevents misunderstandings as the project evolves.  

Fixed-Price Contract Pros	Fixed-Price Contract Cons
Reduced financial risk for clients	The contractor bears the risk of overruns
Well-defined project deliverables	Delay in feedback may stall the project timeline
Incentives for excellent work.	Disputes due to change in project scope
Easy-to-draft contract expectations

When should I avoid using a fixed-price contract?

Fixed-price agreements aren’t always a good idea. Stay away from them if:

• The project is complex
• Flexibility is important 
• Uncertain or unclear scope
• Longterm duration

What should a fixed-price contract include?

A fixed-price contract should include the following items:

• A defined scope of work: Services to be provided, objectives, deliverables, and associated tasks. It should also highlight what is excluded from the project scope
• Firm price: The final fee agreed upon by both parties
• The payment schedule and necessary milestones: The schedule should specify when each payment will be processed and the amount to be paid at each milestone
• The contract duration: Including this makes tracking and delivering progress reports easy
• The evaluation approach: How will progress be measured, what processes will this involve, etc?
• Dispute resolution process: How changes to the contract will be managed and disputes resolved
• Termination clause(s): Ensuring both parties know how to terminate the contract if necessary
• The signature of both parties: To ensure the contract is valid and legally binding

Before signing a fixed-price contract, both parties should check it abides by any legal contractual arrangement standards.

How to manage a fixed-price contract project with time tracking

A time tracker like Toggl Track allows you to manage fixed-price projects confidently.

Here’s how:

1. Estimate the time required to complete a project by looking at similar past projects. 
2. Identify bottleneck tasks that have taken longer than estimated and adjust your estimate accordingly.
3. Set current labor costs for your team.
4. Track the actual time spent on a project’s tasks and compare it against the estimates on the Project Dashboard. Share it with clients to communicate project progress.
5.  Monitor the Project Insights dashboard to ensure your fixed-price projects remain profitable.
6. Adjust the project resources or scope to handle bottlenecks and risks.  

If you want more insights from your project time data, consider using Toggl Track’s Analytics feature. 

With Analytics, you can create custom charts and reports to gain insights that are unavailable in the Project Dashboard and Insights reports.  

The bottom line

Fixed-price contracts are one of the best ways for contractors and teams to eliminate the risk of cost overruns during a project. 

Not only does this make budget planning more reliable, but it also motivates you to work more efficiently and optimize available resources, which affects your profit margins.

Before committing to a fixed-price contract, implement measures to facilitate easy communication and collaboration.

Want to create budgets that accommodate market fluctuations? Ship your projects to Toggl Track and start tracking your billable and non-billable hours. Toggl Track lets you set fixed fees, estimate profits, and monitor your progress.

With Toggl Track, you can embrace the terms of fixed-price contracts and deliver great work whenever, wherever. Get started by signing up for a free account.