What defines a 'fixed-price contract' in construction?

A fixed-price contract is characterized by an agreed-upon price set before the commencement of the work, which remains unchanged regardless of the project's eventual costs or difficulties encountered during construction. This arrangement provides a level of financial predictability for both the contractor and the client, as each party knows the financial parameters from the outset. The benefit of a fixed-price contract lies in the potential for cost savings and efficient budget management, as the contractor is incentivized to complete the project within the specified budget.

In this type of contract, the risks associated with cost overruns typically fall on the contractor, which promotes careful planning and execution. This structure makes it essential for contractors to accurately estimate their costs and schedule alongside the project’s scope. Fixed-price contracts are often used in commercial construction when the project's specifications and conditions are well-defined, enabling parties to commit to a fixed sum with confidence.