Fixed Price (FP)
A Fixed Price (FP) contract is the simplest kind of agreement between a buyer (the person or company paying for the work) and a seller (the person or company doing the work). Before the work begins, both sides agree on one set price for the finished product or service. That number does not change, no matter what happens along the way.
Because the price is locked in, the seller carries the cost risk. "Cost risk" simply means the danger of the work costing more than expected. If the seller's actual costs turn out higher than they planned, the seller absorbs that loss and still delivers for the agreed price. If the seller finds a way to do the work more cheaply, they keep the difference as extra profit.
To read this "formula," there is nothing to calculate — the price is a single agreed amount. A project manager chooses a fixed price contract when the work is very well defined and predictable, so both sides can confidently agree on a price up front. It gives the buyer great certainty about what they will pay.
Think of it like ordering a fixed-price meal at a restaurant. You see one price on the menu, you pay that price, and it's the kitchen's problem — not yours — if the ingredients cost them more that day.
Imagine you hire a company to build a standard garden shed for a fixed price of $5,000. That is the whole deal. If the company's materials and labor end up costing them $4,200, they earn $800 profit. But if lumber prices rise and their costs climb to $5,600, they must still deliver the shed for $5,000 and absorb the $600 loss themselves. Either way, you pay exactly $5,000.
Every PMP formula explained free — plus worked examples and practice in PMP Math, and full timed mocks in the simulator.