What is the difference between fixed-price and cost-reimbursement contracts?

The distinction between fixed-price and cost-reimbursement contracts is pivotal in contract management and procurement. Fixed-price contracts establish a pre-defined payment amount for the goods or services provided, regardless of the actual costs incurred by the contractor. This type of contract places the risk on the contractor, as they must manage their costs effectively to fulfill their obligations under the contract while maintaining profitability.

On the other hand, cost-reimbursement contracts allow the contractor to be reimbursed for their allowable incurred costs plus a fee that is typically predetermined. This structure provides the contractor with more flexibility and reduces their risk, as they are assured of being compensated for their expenses, even if they exceed initial estimates. This type of contract is often used when the scope of work is uncertain and it is difficult to estimate costs accurately.

Understanding this fundamental difference is crucial for anyone involved in contract management, as it informs decisions about pricing strategy, risk allocation, and the level of oversight required for each type of contract.