Fixed Price

• A fixed price arrangement includes a predetermined price agreed upon by the company and the customer. The company determines what its costs include and its target profit prior to entering the negotiation. The customer calculates the price it can afford to pay. The company and the customer discuss a price agreeable to both. This price remains unchanged throughout the term of the contract.
  
  

Cost Reimbursement

• A cost reimbursement arrangement provides a changing selling price for the agreement. The customer agrees to pay a fixed price plus any additional costs incurred by the company. These costs include materials, additional labor charges or specialty services. The company shares specific cost information with the customer when it knows what those costs will be.
  
  

Final Price

• One difference between fixed price contracts and cost reimbursement arrangements involves the final price the customer pays. Under a fixed price arrangement, the customer knows its cost on the day of the agreement. The arrangement stipulates a plan to pay that amount on the due date and uses this information to create its budget. Under a cost reimbursement arrangement, the customer does not know the final cost. The arrangement estimates what that cost will be and uses this number in the budget.
  
  

Risk

• Another difference between fixed rate contracts and cost reimbursement arrangements considers the risk involved with cost changes. Under a fixed rate contract, the company incurs the risk of cost increases with supplies or labor. This risk motivates the company to keep costs low. Under a cost reimbursement arrangement, the customer bears the risk of cost increases. As supply costs increase, the final selling price also increases. The company incurs no risk and has little motivation to keep costs low.