How do fixed-price contracts differ from cost-plus contracts?

Fixed-price contracts lock in a total price for the project at the outset, providing clarity and certainty for both parties regarding the amount that will be paid for the completed work. This type of contract places the risk of cost overruns on the contractor, who must complete the project within the agreed-upon price. In contrast, cost-plus contracts reimburse the contractor for all allowable expenses incurred during the project and typically include an additional fee or percentage to cover profit. This creates more variability in the final cost as it directly depends on the actual expenses incurred rather than a predetermined amount.

Understanding the differences between these contract types is crucial for managing budget risk and determining the appropriate contract for a given project. Fixed-price contracts are often preferred for projects with well-defined scopes, while cost-plus contracts may be more suitable for projects where scopes are less certain or likely to change.