Fixed price
 |
This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (June 2007) |
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.
[edit] 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 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 overruns.
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.[1]
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.[2]
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.[3]
