A firm price contract, also known as a fixed price contract, is an agreement between two parties where the price for goods or services being exchanged is set and locked in at the beginning of the contract.
In such a contract, the price agreed upon is a fixed amount and will not change regardless of how much the cost of production or raw materials may fluctuate during the contract period. This means that if the seller makes any cost overruns, they cannot pass them on to the buyer.
Firm price contracts are typically used in projects that have a clear scope of work, which makes it easier to define a fixed price. This type of contract is common in industries such as construction and consulting, where it`s important to have a set budget and timeline.
Under a firm price contract, both parties have a clear understanding of the cost of the goods or services being exchanged. This can help to manage risk and ensure that there are no surprises or disputes over payments.
However, this type of contract may not be suitable for all situations. If the scope of work is unclear or changes constantly, it may be difficult to set a firm price. In such cases, a time and materials contract may be more appropriate.
In summary, a firm price contract is an agreement between two parties to exchange goods or services for a fixed price. This type of contract is useful in projects with a clear scope of work and can help to manage risk and ensure that there are no disputes over payments.