Types of Fixed Price Contracts
The firm fixed price contract is commonly used by firm in doing business transactions because a lot of buyers are uncomfortable of the other types of contracts.
This article is meant only to explain the different types of fixed contracts in order for Supply Management Professionals to choose the right type of contract depending on the situation.
Firm Fixed Price Contract
This type of contract is used for items that are easily defined and have an established pricing. In a firm fixed price contract, the buyer agrees to pay a fixed amount of price in exchange for a fixed quantity of goods.
Fixed Price Escalation Contract
Fixed price escalation contract is usually used when a specific item will be delivered for several years. Material fluctuations are very common in our market today.
Thus, the escalation cost protects both buyer and seller from the difference in labour or material.
Fixed Price Incentive Contract
This contracting arrangement is recommended for purchasing materials that are difficult to define or has never been produced in the past.
This contract deems to protect the buyer from contracting a seller at a high price. This contract requires the supplier and buyer to establish the following criteria:
- Maximum contract price;
- Target contract price;
- A service fee
- Sharing formula (60/40)
Fixed Price Redetermination Contract
Government agencies usually use this type of contract. This contract provides negotiated upward and downward adjustments due to material and labour fluctuations.
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