A Brief Introduction About the Fixed Price Contract
In Fixed Price Contracts, the company wants to acquire commercial products or supplies and services and decides to set a ceiling on the price they are willing to pay.
The experience of the contractor will not affect the cost of the contract. If the contractor is unable to complete the contract within the given price, then they will have to bear all the additional costs and suffer a loss. As per the contract definition, payment is not linked to the resources used or the time spent on the project, unlike cost-plus contracts, where the price is based on the total cost incurred for the contract and profit calculated as a percentage of the total cost.
In a fixed unit price contract, there is a set price per unit, and the number of units that are to be delivered is not known. The unit could be a product or the per hour rate for a particular service.
In Fixed Price Contracts, the experience of the contractor as far as the performance of the contract is concerned is not important while setting the contract price.
Who Takes the Fixed Price Contract – People Involved
When a company wants to engage a vendor for delivering either goods or services at a fixed price, which cannot be adjusted according to the experience of the contractor, this type of contract is entered into.
The contractor has to complete the job within the given deadline and maintaining the required quality or suffer a loss.
Purpose of the Fixed Price Contract – Why Do You Need It
There are specific parameters that apply to such contracts, and they are suitable in certain circumstances. These contracts work when there is adequate price competition. There should be certified cost or pricing data for comparison with similar supplies or services. You should be able to identify the performance uncertainties.
There are certain products or services which can be supplied within a specific price as determined through existing available data. The average time taken for the completion of these projects is also known. So, when a company decides to award a project to a particular vendor, the price is fixed, and there is no scope for escalation of cost or extension of the contract period.
Without a contract, the vendor will not have the incentive to complete the project on time, and there will be both time and cost overruns. The company that has outsourced the work will face huge losses due to the delays, and they will have to bear additional costs to replace the vendor in the middle of the project.
The vendor may optimally use the resources and manage time to meet the deadlines set by the company and not get paid if there is no contract. If the vendor can finish the contract within the given period, then both the company and the contractor gain. If the vendor cannot complete the job within the deadline, then they will bear the full responsibility for all costs.
Contents of the Fixed Price Contract – Inclusions
A fixed price contract is an example of transferring risk from the buyer to the seller. If the seller can keep the costs under control, then they will be rewarded substantially.
Here are the contents of the contract:
- The names of the parties to the contract, the company, and the contractor
- The complete address and other communication details of the company
- The effective date of the contract
- The nature of services being provided by the contractor
- The deliverables for the contractor and where the reports should be sent
- The detailed description of the job as per the schedules provided as annexures along with the report
- Representations, Warranties, and covenants: The contractor has to ensure there is no violation of confidential or proprietary information and the company should provide the contractor with data that is legally permissible for TMT
- Term and termination: The start and end date of the contract. The contract can be terminated by the company if there is a breach by the contractor or for its convenience.
- Price and payment: The firm-fixed-price payable to the contractor, including interim payments made for milestones achieved. The contractor shall submit an invoice for the firm fixed price when the final deliverable is complete
- Non-disclosure clause: Proprietary information should not be shared with any third party, except for certain disclosures
- Additional terms and conditions: The vendor is an independent contractor and is not an employee of the contractor. The contractor indemnifies the company from any losses or liabilities, attorney fees and another cost of defense due to any negligence on the part of the contractor
How to Draft the Fixed Price Contract – Points to Consider While Preparing the Agreement
You can refer to a fixed price contract template when drafting an agreement. The template can be modified according to your particular needs.
The following points should be kept in mind when drafting a contract:
- Competence to contract: Both the company and the vendor should be over the legal age, of sound mind and should not be under the influence of alcohol or drugs at the time of signing the contract
- Consideration for the contract: The fixed price payable to the vendor on satisfactory completion of the work within the given deadline should be mentioned
- Contract terms: The terms of the contract should be favorable to both the vendor and the company. There should be no fraud or deception by any party
- Confidentiality clause: The vendor should not disclose any proprietary information related to the company with a third party
- Dispute resolution clause: Whether disputes should be resolved by arbitration and litigation, payment of attorney fees and legal jurisdiction for resolving the breach
- Termination clause: When the contract is being terminated prematurely, the notice period to be served by both parties
- Governing laws: The contract should adhere to the applicable laws of the state
- Space for signatures and dates: The last page of the contract should be saved for signatures and dates
In case of a fixed price incentive fee contract, if the vendor is paid the contract fee on successful completion of the contract. If the vendor can fulfill certain performance criteria, then the buyer pays the seller a certain incentive.
The seller and buyer can negotiate the incentive since the price of the main contract is fixed. The final incentive will depend on the mutually agreed amount.
Benefits & Drawbacks of the Fixed Price Contract
The benefits are as under:
- Protection of interest of both parties: The company is assured of the timely delivery of the project, which adheres to the quality specifications as well. The vendor knows that they will have no problem in receiving payment provided the work has been satisfactorily completed
- The incentive for the vendor: If the vendor can meet the quality parameters set by the company, then they will get an additional amount as an incentive
- Termination of contract: If either party is not satisfied with the work, then they can prematurely end the contract as per the contract clause. They will have to serve a notice to the other party
The drawbacks are given below:
- Failure to complete work: Without a contract, the vendor may either delay the completion of the work and force the company to bear the additional cost or leave midway causing losses for the company
- No legal recourse: If either party to the contract don’t fulfill their contractual obligations, then no legal action can be taken to claim any losses suffered
- Non-payment by the company: The vendor may not get paid even after satisfactory completion of the contract, or the incentive promised in a fixed price incentive contract
What Happens in Case of Violation of Fixed Price Contract?
In case of violation of the contract, the injured party may try to resolve the matter amicably through a discussion. If that fails, then a notice specifying the clause that has been violated will be sent. When the party violating the contract does not heed the notice, then legal action has to be taken.
Here are the legal remedies available to both parties:
- Rescission of contract: In case one party breaches the contract, then the other party has no other contractual obligations. The injured party sends both a rescission contract as well as a suit for damages
- Suit for damages: The aggrieved party is entitled to either ordinary or general damages, special damages, exemplary or punitive damages, and nominal damages. The damages are in the form of monetary compensation to restore the aggrieved party to the position they were in before the contract was signed
- Suit for Quantum Merit: The injured party may claim payment on a pro-rata basis about the work done or services provided
- Suit for specific performance: Under this remedy, the work needs to be completed, as mentioned in the contract. This is applied where the damages cannot be ascertained, monetary compensation is not adequate, or a significant portion of the work has been completed
- Suit for injunctions: If one of the parties to the contract does something which was not part of the contract, then a suit for injunctions has to be filed to restrain them
In a fixed price construction contract, the price for the contract is set by the construction company, and the vendor has to ensure that the project is delivered before the deadline and the quality is up to the mark. Both the company who engages the vendor for goods or services and the contractor who is supplying the same needs to ensure that the contract has specific clauses that protect them.
The contract should specify the quality parameters and deadlines along with the payment along with incentive details. The due date for payment should be mentioned. There should be a dispute resolution clause that will simplify the dispute resolution process as both parties know whether the matter will be solved through arbitration or litigation. The termination clause will allow the parties to terminate the contract prematurely if they do not wish to continue. A notice has to be served to the other party. Both parties to the contract should read the terms and conditions carefully and then sign the contract.