Question

You are negotiating a contractor with a client and they have requested a fix-price contract. The client wants to control their costs and limit their risk. You have been asked to make a recommendation to the executive team on the request and help them decide on accepting this contract. What are the advantages and disadvantages of such a contract? What other types on contracts could you recommend?

Answer 1

A fixed-price contract means that the parties to the contract cannot change the prices or consideration according to the changing resources or allocation of the resources. The risks are on the contractor, and it places the responsibility of profit or loss on the parties. It also provides benefits to the seller who provides benefits more than the objectives. It implies that the seller has agreed with the buyer by way of contract to deliver the services or products at a particular, and fixed price. The sellers have the obligation and responsibility to complete the contract and the performance. The advantage of the said contract is that it allows the consumers to correct the mistakes.

Moreover, it also allows the sellers to earn more. It may be possible that the seller spends less than the consideration of the contract. It also helps the small business enterprises to manage their costs because they already know the costs. It also helps them to take necessary actions or invest to meet the requirements. The disadvantages differ with the parties. If the contact cost is more than the actual cost incurred, the sellers have an advantage, but the buyers do not.

Similarly, when the cost of the contract is less, the seller has to incur extra costs. It acts as a disadvantage for the sellers. At times, the sellers might also increase the cost of the contract to avoid any future risks. The parties can also use a specific performance contract. It will obligate the parties to the contract to perform the contract, and pay the necessary consideration. The consideration is in the contract.