REALWorld Law


'Fixed price contracts'

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

United States

United States

Yes, parties can enter into a ‘fixed price contract’, often referred to as a ‘lump sum’ or ‘stipulated sum’ contract, for performance and completion of the construction work. However, although the price is fixed, the lump sum amount might be increased for certain reasons, including additional work that the owner would like the contractor to perform, differing site conditions (see Limitation period), or force majeure (see Allocation of risk).

Additional work causing an increase to a lump sum contract likely would be performed pursuant to a ‘change order’, which is an amendment to the contract signed by both owner and contractor providing for the additional work. Change orders should describe the change in the work and state any change in compensation or time as a result of the changed work.

In a lump sum contract, the contractor generally takes the risk of increases in the cost of labour and materials, but also benefits in the event of any decrease. In such a case, fluctuations in price or the labour force will not change the lump sum amount.

Absent the ability to add to or reduce the scope of work (and thereby increase or decrease the lump sum amount), an owner would not be able to make any material change to the project after execution of the contract, which is often too rigid for most owners. Thus, fixed price contracts generally have some mechanism where compensation can be changed under certain circumstances.