What are the differences between cost reimbursement and fixed-price contracts?

Cost reimbursement contracts and fixed-price contracts differ in how the costs of the contract are handled and how much risk the parties involved are willing to take. Cost reimbursement contracts are used when the cost of the project is uncertain, and they offer the contractor protection against financial losses. Instead of a fixed price, the contractor is reimbursed for reasonable and allowable costs they incur during the project. The contractor has to agree to provide the service based on an estimated amount but will only be paid for the actual costs they incur. This allows the contractor to absorb some risk associated with the project, but the downside is that the contractor is unable to make a profit beyond the actual costs incurred. Fixed-price contracts, on the other hand, are used when the costs are known and the contractor is confident they can meet the project requirements. This type of contract sets a fixed price for the project in the contract and the contractor is paid in full regardless of the costs they incur. Fixed-price contracts offer the contractor the opportunity to make a profit on the project as long as they are able to effectively complete the project, but they also bear the full risk of unexpected costs and have to foot the entire bill if the project goes over budget. In South Dakota, and in other parts of the United States, both cost reimbursement and fixed-price contracts are used in government contracts law. Which type of contract is used depends on the specifics of the project and the needs of the parties involved.

What are the differences between cost reimbursement and fixed-price contracts?

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