The Difference Between Fixed-Price and Cost-Reimbursable Contracts

When entering into a business agreement—especially in industries like construction, government contracting, or consulting—choosing the right type of contract is critical. Among the most common contract types are Fixed-Price Contracts and Cost-Reimbursable Contracts. Each has its own pros, cons, and ideal use cases depending on the scope of work, level of risk, and budget flexibility.

Let’s break down the key differences between the two:

What is a Fixed-Price Contract?

A Fixed-Price Contract is exactly what it sounds like: the buyer agrees to pay the seller a set amount for the delivery of a product or service, regardless of the actual costs incurred.

Key Characteristics:

• Firm Total Price: The price is established upfront and doesn't change (unless there's a formal change order).

• Risk is on the Seller: If the project costs more than expected, the seller eats the loss.

• Best for Well-Defined Projects: These contracts work best when the scope of work is clear and unlikely to change.

Common Types:

• Firm Fixed-Price (FFP): No adjustments for cost overruns.

• Fixed-Price Incentive Fee (FPIF): Includes performance incentives.

• Fixed-Price with Economic Price Adjustment (FPEPA): Adjusts for inflation or market changes.

Pros:

• Easy to budget for.

• Encourages efficiency on the contractor’s end.

• Minimal administrative burden for the buyer.

Cons:

• Less flexibility for changes.

• Can lead to inflated bids to cover potential risks.

• Contractors might cut corners to protect profit margins.

What is a Cost-Reimbursable Contract?

In a Cost-Reimbursable Contract, the buyer agrees to cover the actual costs incurred by the contractor, plus an additional fee (which might be fixed or performance-based).

Key Characteristics:

• Payment Based on Actual Costs: Contractor bills for actual expenses, with documentation.

• Risk is on the Buyer: The buyer assumes the risk of cost overruns.

• Best for Uncertain or Evolving Projects: Ideal when the scope is not clearly defined at the start.

Common Types:

• Cost Plus Fixed Fee (CPFF): Contractor is paid for costs plus a fixed fee.

• Cost Plus Incentive Fee (CPIF): Incentives are provided for performance or cost-saving.

• Cost Plus Award Fee (CPAF): Awards are based on contractor’s performance.

Pros:

• High flexibility for changes.

• Better suited for complex or research-based projects.

• Encourages collaboration and innovation.

Cons:

• Harder to budget and control costs.

• Requires extensive oversight and documentation.

• Can drag on longer and become more expensive than anticipated.

Final Thoughts

Both contract types serve a purpose in project management and procurement. Fixed-price contracts offer predictability and cost control but can be rigid, while cost-reimbursable contracts offer flexibility and innovation but require trust, oversight, and an open wallet.

If you're new to contracting or navigating complex deals, it's wise to consult with a procurement professional or contract expert. Choosing the wrong contract type can have serious financial consequences—so it pays to get it right from the start.

Need help negotiating or reviewing your next contract? Drop a comment or reach out—we're here to help.