How does a fixed-price contract differ from a cost-reimbursement contract?

A fixed-price contract is structured to pay a predetermined, agreed-upon amount for the entire contract scope, meaning that the contractor is responsible for completing the work within that fixed budget. This arrangement places the financial risk primarily on the contractor, as they must manage costs and performance effectively. Conversely, a cost-reimbursement contract allows the contractor to receive reimbursement for allowable costs incurred while completing the project, in addition to a fee that may be structure dependent.

This distinction is pivotal as it reflects the nature of risk and financial responsibility each party assumes under these two contract types. The key aspect of the fixed-price contract is that it provides budget certainty for the buyer while incentivizing the contractor to control costs. On the other hand, the cost-reimbursement contract is more flexible and mitigates risk for the contractor, making it suitable for projects where unpredictability in costs is a significant factor.

This understanding enhances one's knowledge of contract types and their implications on financial risk management within the realm of contracting practices.