Fixed Price
A pricing structure with a guaranteed total amount the owner will pay for the defined scope, regardless of actual contractor costs.
Definition
A fixed-price contract guarantees a single total amount that the owner will pay the contractor for completing a defined scope of work. The contractor absorbs the risk of any cost overruns within that scope, and any savings from efficient execution flow to the contractor as additional profit.
In construction, "fixed price" and "lump sum" are typically used interchangeably. The distinction sometimes drawn is that "fixed price" can include arrangements like a guaranteed maximum price (GMP), while a pure lump sum is always a single number with no underlying cost-tracking obligation.
How fixed price is used in estimating
Fixed-price estimating starts with a complete takeoff and bid build-up. The estimator prices every scope, adds general conditions, overhead, profit, and contingency, and submits a single total. After award, the contract value does not change unless a change order modifies scope. The contractor administers the project against an internal schedule of values that aligns to the fixed total.
Fixed price is the dominant pricing model on private commercial work, government building work, and most subcontracts. It gives the owner cost certainty and forces the contractor to plan rigorously upfront. The downside is that the contractor builds in contingency and risk premium, which can make a fixed-price bid more expensive than the actual cost of construction would have been on a cost-plus basis.
When fixed price works best
Fixed price works best when the design is essentially complete, the specifications are clear, and the project conditions are well understood before bidding. New construction on a clean greenfield site is the ideal candidate. Renovation and adaptive reuse projects with hidden conditions are riskier candidates for fixed price, since unknowns can erode the contractor’s margin or force expensive change orders.
Frequently asked questions
Q.Is fixed price the same as lump sum?
In construction practice, yes — most contractors use the terms interchangeably. Both refer to a single guaranteed total for a defined scope. Some lawyers reserve "fixed price" for arrangements that include GMP-style cost tracking.
Q.What happens if the contractor overruns on a fixed-price job?
The contractor absorbs the loss. The owner still pays the contracted fixed price regardless of what the contractor’s actual costs were. This is the price the contractor pays for the certainty premium baked into the bid.
Q.How are change orders handled on fixed-price contracts?
Changes that fall within the contracted scope are at the contractor’s risk. Changes that fall outside the contracted scope (added work, design changes, owner-requested modifications) generate change orders that adjust the contract value.
Q.Why are fixed-price bids more expensive than cost plus?
They include a risk premium and contingency to cover potential overruns. On a clean job with no surprises, that premium is profit for the contractor. On a difficult job, it is what protects the contractor from loss.
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