A fixed-price contract, also known as a lump sum contract, is an agreement between a vendor or seller and a client that stipulates goods and/or services that will be provided and the price that will be paid for them.
Fixed-price contracts are common in many IT contexts, including project management, procurement and outsourcing. Having the scope and cost clearly defined from the outset saves administrative time and also avoids much of the negotiation time required for less clear-cut types of agreements. However, the resources and time required to produce goods or provide services must be considered carefully by the seller. Those lacking considerable experience with similar endeavors should be wary of fixed-price contracts because it may be difficult for them to foresee all the resources that will be required and how long various tasks will take.
Fixed-price contracts may be inflexible or may stipulate circumstances under which adjustments may be made. In a firm fixed-price (FFP) contract, products or services must be delivered by the agreed-upon date and the payment rendered according to the agreement. Any unforeseen costs of production must be borne by the seller. Other variations on the model include fixed-price incentive fee (FPIF) contracts, in which the seller is offered additional payment for performance beyond that stipulated in the agreement. For example, the seller might deliver ahead of schedule or add features beyond the initial scope of the project.