What is a fixed price contract?
A fixed price contract is an agreement where the total cost of a project is decided before work begins. The price stays the same unless both sides agree to changes later on.
It is common in UK construction, recruitment, software, and freelance work because businesses know exactly what they will pay from day one.
How does a fixed price contract work?
With a fixed price contract, the business and supplier agree on the full scope, timeline, deliverables, and payment amount before the project starts. Once signed, the contractor completes the agreed work for that set price.
For example, a Manchester marketing agency might agree to build a company website for £4,000 with a 6-week deadline. If the work takes longer than expected, the agency usually absorbs the extra cost. However, if the client asks for extra pages or features halfway through, that would normally require a contract change or additional fee.
Types of fixed price contracts
There are a few common fixed price contract types used across UK industries:
- Firm fixed-price contract - One agreed price for the full project.
- Fixed-price incentive contract - Bonuses for early completion or strong performance.
- Fixed-price with economic adjustment - Allows changes if material or labour costs rise sharply.
- Milestone-based fixed contract - Payments released at agreed stages.
These contracts are especially common in UK construction and infrastructure projects. In fact, a RIBA industry survey found that 77% of respondents said fixed price or lump-sum contracts were the most commonly used contract type.
When should you use a fixed price contract?
A fixed price contract works best when the project details are clear before work begins. It helps businesses control costs, reduce financial surprises, and plan budgets more confidently.
You should consider using one when:
- The project scope is clearly defined
- Deliverables and deadlines are agreed upfront
- You have a fixed budget to work with
- The work is unlikely to change midway
- You want simpler invoicing and payment tracking
Pros and cons of a fixed price contract
Like most business agreements, fixed price contracts have advantages and drawbacks.
Pros:
- Easier budgeting and cash flow planning
- Clear deadlines and deliverables
- Less risk of rising hourly costs
- Simpler invoicing process
Cons:
- Less flexibility if project needs change
- Contractors may charge higher upfront prices to cover risk
- Scope disputes can happen if details are unclear
- Changes often lead to extra fees or delays
For SMEs, the biggest win is usually cost certainty. The biggest headache? Extra requests and changes increasing costs later on.
Fixed price contract vs time and materials contract
Both contracts are common in UK business projects, but they work...well, quite differently. A fixed price contract gives cost certainty, while a time and materials contract offers more flexibility if project requirements may change.
| Fixed Price Contract |
Time and Materials Contract |
| One agreed total price |
Paid based on hours and materials used |
| Best for clear project scope |
Best for flexible or changing projects |
| Easier budgeting |
Costs can increase over time |
| Lower financial risk for clients |
More flexibility during the project |
What should a fixed price contract include?
A fixed price contract should clearly explain what is being delivered, how much it costs, and when the work should be completed. The more specific the agreement, the lower the risk of disputes later on.
Most fixed price contracts include:
- Project scope and deliverables
- Payment terms and milestones
- Responsibilities of both parties
- Cancellation or termination terms
In the UK, many businesses also include clauses covering delays, intellectual property, and confidentiality for extra protection.
Fixed price contract explained with a quick example
A Leeds-based marketing agency hires a freelance web developer to rebuild its website pages before launching a new service campaign. Both sides agree on a fixed price of £3,500 for five redesigned pages, mobile optimisation, and contact form updates, with delivery due in four weeks.
Because the work is clearly defined upfront, the agency knows exactly what it will pay. When the agency later requests extra landing pages, the developer quotes those separately as additional work.
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