Fixed price project
In a fixed price project the price is agreed before the work begins and does not move with the effort actually required. The supplier carries the risk of the estimate being wrong, and the margin is whatever remains between the agreed price and what delivery really costs.
Why do clients prefer a fixed price?
Because it turns an uncertain cost into a known one. The budget can be approved, compared against other offers and defended internally. What the client gives up is flexibility, since every change to the scope has to be renegotiated. In return, the risk of the estimate being wrong moves to the supplier.
Where does a fixed price project usually go wrong?
In the estimate, not in the delivery. An estimate built from memory rather than from what comparable projects really took is wrong before anyone starts, and no amount of efficiency during delivery recovers it. Since the price does not move with the effort, the margin is whatever remains between the agreed price and what delivery really costs.
How is a fixed price project controlled?
By comparing recorded effort against the effort the price was built on, per phase, while phases are still ahead. The price cannot change, so the only variable left is what is still to be done, and that has to be known early.
When should a fixed price be avoided?
When the scope is genuinely open, when the client is likely to add to it, or when there is no data on what comparable work took. A fixed price without a basis is a guess with a contract attached to it.
troi prices new work from what comparable projects really took. See project estimation.