What type of contract often has a fixed cost agreed upon before the project begins?

A fixed-price contract is characterized by a pre-determined total cost for the project or specific deliverables, agreed upon before the work begins. This type of contract establishes a clear budget that the client won’t exceed, which provides both parties with a degree of certainty regarding financial commitments and expectations. The contractor takes on the risk of cost overruns, thereby incentivizing them to complete the project within the agreed-upon budget.

In contrast, cost-plus contracts typically allow for reimbursement of costs incurred, plus an additional fee or percentage for profit, making costs less predictable. Unit price contracts involve payment based on the number of units produced or delivered, which can also lead to variable costs depending on the project's scope. Open-ended contracts do not have a fixed cost and may lead to fluctuating expenses as work progresses, lacking the financial predictability that the fixed-price model provides. Therefore, the fixed-price contract is most suitable for projects where the scope and costs can be clearly defined upfront.