The silent death of the fixed-price contract

For decades, the fixed-price contract has been the backbone of construction procurement. It promised certainty with a defined scope, an agreed sum and a clear transfer of risk from client to contractor. In theory, it allowed projects to be planned with confidence and budgets to be locked in early. In practice, however, the world that made fixed-price contracting viable no longer exists. What we are witnessing today is not a dramatic collapse, but a quiet, incremental withdrawal. The fixed-price contract is not being officially abandoned, yet across the industry it is being redefined, resisted and increasingly avoided. In reality, this is the silent death of a procurement model that can no longer survive the conditions of modern construction, writes John Ridgeway.

Fixed-price contracts were born in a more stable environment. Supply chains were predictable, inflation was modest, labour markets were relatively steady and regulatory change was slower. Under those conditions, contractors could reasonably price risk and absorb fluctuations within manageable margins.

Today’s construction landscape bears little resemblance to that past. Material prices can swing dramatically in months rather than years. Skilled labour shortages disrupt programmes without warning. Design continues to evolve long after contracts are signed. Regulatory changes and sustainability requirements add new layers of complexity mid-project. In this environment, pricing a job “once and for all” is no longer a commercial calculation - it is a gamble.

The fixed-price model relies on the assumption that risk can be identified, priced and transferred at the outset. That assumption is now fundamentally flawed.

At the heart of the fixed-price contract is risk transfer. Clients seek cost certainty by passing uncertainty down the supply chain, often to the party least able to control it. On paper, the contractor carries the risk. In reality, the risk does not disappear - it simply resurfaces later as claims, disputes, delays or insolvency.

Good contractors understand this. They know that a fixed price does not eliminate uncertainty - it only postpones the consequences. When unforeseen conditions arise, the contractual battle begins with the questions - was the risk foreseeable, was it included, does it qualify as a variation? The project becomes less about delivery and more about interpretation. What was once sold as certainty has become a source of friction and friction is expensive.

The inflation shock that changed everything

Recent years have exposed the fragility of fixed-price contracts more brutally than any academic argument ever could. Inflationary spikes in energy, materials and transport costs wiped out margins overnight. Contractors locked into fixed prices found themselves delivering projects at a loss, with no contractual mechanism to recover costs that were never reasonably foreseeable.

Many survived only by drawing down reserves, renegotiating with suppliers or reducing investment elsewhere. Others did not survive at all. The lesson was clear - a fixed price without shared risk mechanisms is not a commercial safeguard - it is an existential threat.

Since then, contractors have quietly changed their behaviour. Some now inflate prices heavily to protect themselves. Others refuse fixed-price work altogether. Many still accept it, but only with caveats, exclusions and assumptions that undermine the very certainty the contract was meant to provide.

Modern construction rarely begins with a fully resolved design. Early contractor involvement, fast-track programmes and evolving client requirements mean that scope is often fluid well into the delivery phase. Fixed-price contracts, however, demand definition at the point of agreement.

This mismatch is one of the biggest drivers of conflict in the industry. Contractors are asked to commit to a price before the design has stabilised, then blamed when that price no longer reflects reality. The result is an endless cycle of variations, claims and commercial disputes.

In practice, many so-called fixed-price contracts are anything but. They are riddled with provisional sums, assumptions and exclusions that create ambiguity. The price may be fixed, but the scope is not and that is where the system breaks down.

Beyond the commercial risk, fixed-price contracts shape behaviour in damaging ways. When contractors carry disproportionate risk, their incentive shifts from collaboration to protection. Information is withheld, decisions are delayed and innovation is avoided because any deviation from the agreed baseline carries financial danger.

Instead of working together to solve problems, parties retreat into contractual positions. The project becomes transactional rather than cooperative. Trust erodes and with it, performance. This is not a failure of individuals. It is a predictable outcome of a contract model that rewards defensiveness over openness.

Why the best contractors are walking away

The most telling sign of the fixed-price contract’s decline is who is rejecting it. High-quality contractors with strong order books are increasingly selective. They walk away from projects where risk is poorly allocated, scope is unclear or price certainty is demanded without corresponding flexibility.

These contractors are not afraid of accountability. They are afraid of unfair exposure. They know that accepting the wrong fixed-price contract can undo years of careful business management. As a result, clients who insist on traditional fixed-price models are often left with a smaller pool of bidders. That is not market failure, it is market signalling.

However, the death of the fixed-price contract does not mean the death of cost control. It means the rise of more intelligent commercial models. Target cost contracts, pain-gain mechanisms, open-book arrangements and inflation-linked pricing are becoming more common, not because they are fashionable, but because they reflect reality.

These models acknowledge uncertainty rather than pretending it can be priced away. They encourage early collaboration, shared problem-solving and transparency. When risk is shared, behaviour improves. When incentives align, outcomes follow. This shift requires courage from clients. It demands a willingness to engage rather than dictate and to manage cost through governance instead of contract wording.

Despite its flaws, the fixed-price contract will not disappear overnight. Institutional inertia, funding structures and internal governance processes still favour the illusion of certainty. Some projects will continue to use fixed prices, especially where scope is genuinely simple and risk is minimal.

But its dominance is over. The model no longer reflects how construction works, how risk behaves or how value is created. Each year, its relevance erodes quietly as more projects adapt to survive. The death of the fixed-price contract is not a crisis. It is a correction. An overdue recognition that certainty cannot be imposed by contract alone – and in a world defined by volatility, collaboration is not a luxury - it is the only viable strategy.