Fixed price
Encyclopedia
The term "fixed price" (as in: fixed-price contract) is a phrase used in the English language
to mean that no bargaining
is allowed over the price of a good or, less commonly, a service. As bargaining is very common in many parts of the world, outside of retail stores in Europe or North America or Japan, this makes this an exception from the general norm of pricing in these areas.
In the United Kingdom
, "fixed price" has a similar meaning, and commonly indicates that an external party (often the government) has set a price level, which may not be varied by individual sellers of a good or service. As part of their rule of honesty and plainness, Quakers set a fixed price for their wares.
Fixed prices can require more time, in advance, for sellers to determine the price of each item (except perhaps at a dollar store). However, the fixed-price items can each be purchased faster, but bargaining could set the price for an entire set of items being purchased, reducing the time for such bulk purchases treated as a whole batch. Also, fixed-price items can help in pre-determining the value of the entire inventory, such as for insurance estimates.
A fixed-price contract is a contract where the amount of payment does not depend on the amount of resources or time expended, as opposed to a cost-plus contract
which is intended to cover the costs plus some amount of profit. Such a scheme is often used in military and government contractors to put the risk on the side of the vendor, and control costs. However, historically when such contracts are used for innovative new projects with untested or undeveloped technologies, such as new military transports or stealth attack planes, it can and often results in a failure if costs greatly exceed the ability of the contractor to absorb unforeseen cost overrun
s.
However, such contracts continue to be popular despite a history of failed or troubled projects, though they tend to work when costs are well known in advance. Some laws have been written which prefer fixed-price contracts, however, many maintain that such contracts are actually the most expensive, especially when the risks or costs are unknown.
Tom Enders
, Airbus
's German chief executive, has noted the fixed-price contract for the A400 transport was a disaster rooted in naivety, excessive enthusiasm and arrogance, stating, "If you had offered it to an American defence contractor like Northrop
, they would have run a mile from it". He stated that unless the contract was renegotiated, the project must be abandoned.
For example, the U.S. A-12 Avenger II
development contract was a fixed-price incentive contract, not a fixed price contract, with a target price of $4.38 billion and ceiling price of $4.84 billion. It was to be a unique, stealthy, flying wing
design. On 7 January 1991, the Secretary of Defense canceled the program. It was the largest contract termination in DoD history. Rather than saving costs, the craft was projected to consume up 70 percent of the U.S. Navy's aircraft budget within three years.
English language
English is a West Germanic language that arose in the Anglo-Saxon kingdoms of England and spread into what was to become south-east Scotland under the influence of the Anglian medieval kingdom of Northumbria...
to mean that no bargaining
Bargaining
Bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service dispute the price which will be paid and the exact nature of the transaction that will take place, and eventually come to an agreement. Bargaining is an alternative pricing strategy to fixed prices...
is allowed over the price of a good or, less commonly, a service. As bargaining is very common in many parts of the world, outside of retail stores in Europe or North America or Japan, this makes this an exception from the general norm of pricing in these areas.
In the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, "fixed price" has a similar meaning, and commonly indicates that an external party (often the government) has set a price level, which may not be varied by individual sellers of a good or service. As part of their rule of honesty and plainness, Quakers set a fixed price for their wares.
Fixed prices can require more time, in advance, for sellers to determine the price of each item (except perhaps at a dollar store). However, the fixed-price items can each be purchased faster, but bargaining could set the price for an entire set of items being purchased, reducing the time for such bulk purchases treated as a whole batch. Also, fixed-price items can help in pre-determining the value of the entire inventory, such as for insurance estimates.
Fixed-price contract
A fixed-price contract is a contract where the amount of payment does not depend on the amount of resources or time expended, as opposed to a cost-plus contract
Cost-plus contract
A cost-plus contract, also termed a Cost Reimbursement Contract, is a contract where a contractor is paid for all of its allowed expenses to a set limit plus additional payment to allow for a profit. Cost-reimbursement contracts contrast with fixed-price contract, in which the contractor is paid a...
which is intended to cover the costs plus some amount of profit. Such a scheme is often used in military and government contractors to put the risk on the side of the vendor, and control costs. However, historically when such contracts are used for innovative new projects with untested or undeveloped technologies, such as new military transports or stealth attack planes, it can and often results in a failure if costs greatly exceed the ability of the contractor to absorb unforeseen cost overrun
Cost overrun
A cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred in excess of a budgeted amount due to an under-estimation of the actual cost during budgeting...
s.
However, such contracts continue to be popular despite a history of failed or troubled projects, though they tend to work when costs are well known in advance. Some laws have been written which prefer fixed-price contracts, however, many maintain that such contracts are actually the most expensive, especially when the risks or costs are unknown.
Tom Enders
Tom Enders
Tom Enders is the chief executive of Airbus; he has held this position since 2007. He previously worked at DASA.He studied at the University of Bonn and at UCLA....
, Airbus
Airbus
Airbus SAS is an aircraft manufacturing subsidiary of EADS, a European aerospace company. Based in Blagnac, France, surburb of Toulouse, and with significant activity across Europe, the company produces around half of the world's jet airliners....
's German chief executive, has noted the fixed-price contract for the A400 transport was a disaster rooted in naivety, excessive enthusiasm and arrogance, stating, "If you had offered it to an American defence contractor like Northrop
Northrop
Northrop Corporation was a major United States aircraft manufacturer which merged with Grumman in 1994 to form Northrop Grumman.Northrop may also refer to:-Places:In the United States:* Northrop, Minnesota, a town...
, they would have run a mile from it". He stated that unless the contract was renegotiated, the project must be abandoned.
For example, the U.S. A-12 Avenger II
A-12 Avenger II
The McDonnell Douglas/General Dynamics A-12 Avenger II was a proposed American ground-attack aircraft from McDonnell Douglas and General Dynamics. It was to be an all-weather, carrier-based stealth bomber replacement for the Grumman A-6 Intruder in the United States Navy and Marine Corps...
development contract was a fixed-price incentive contract, not a fixed price contract, with a target price of $4.38 billion and ceiling price of $4.84 billion. It was to be a unique, stealthy, flying wing
Flying wing
A flying wing is a tailless fixed-wing aircraft which has no definite fuselage, with most of the crew, payload and equipment being housed inside the main wing structure....
design. On 7 January 1991, the Secretary of Defense canceled the program. It was the largest contract termination in DoD history. Rather than saving costs, the craft was projected to consume up 70 percent of the U.S. Navy's aircraft budget within three years.