What differentiates a fixed-price contract from a time-and-materials contract?

A fixed-price contract is defined by its agreed-upon total price for the entire project, regardless of the time or resources required to complete it. This means that once the contract is signed, the contractor cannot increase the price even if the project takes longer or requires more materials than initially anticipated. The client knows the total cost upfront, which can provide financial predictability.

In contrast, a time-and-materials contract is structured to charge the client based on the actual time spent on the project, along with the cost of materials used. This type of contract is beneficial when the scope of work is not clearly defined, allowing for flexibility in billing as the project evolves. Clients may appreciate this format in situations where changes to project requirements are anticipated.

The distinction drawn between these two contract types is crucial because it impacts budgeting, project scope management, and risk distribution. In fixed-price contracts, the contractor bears the risk of underestimating costs, while in time-and-materials contracts, the client retains more control over expenses as they pay based on actual performance. Understanding these differences helps contractors and clients choose the appropriate contract type based on project needs and risk tolerance.