What is a Fixed Fee?

Terry Masters
Terry Masters
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Businessman giving a thumbs-up

A fixed fee, or flat fee, is a charge for goods or services that is set at the beginning of a transaction and does not change. The fee can be fixed regardless of usage over a specific length of time or until a certain threshold is reached. When used in contracts between parties, it refers to a flat fee for a prescribed scope of services that does not increase no matter how long the work takes or any additional expenses incurred to do the work. A fixed fee or expense is the opposite of a variable fee expense.

The two categories of expenses that are important in accounting for business or budgeting are expenses with a fixed fee and expenses with a variable fee. These two categories are typically kept separate on an accounting statement or budget because fixed fee expenses are known in advance, stay the same every month, and can be extrapolated into the future with certainty. A variable fee expense changes depending upon how much of the good or service is used. If a person or a business wants to cut back on expenses, the variable category would receive the most attention because usage can be decreased, limiting the expense immediately.

Rent on an apartment is a fixed fee expense. The cost of rent ordinarily stays the same, month after month. Electricity is typically a variable fee expense. Most people are charged based on how much is used each month. When adding the expense for electricity to a budget, the cost could be estimated but not known for certain in advance.

A fixed fee expense is not tied to usage but is typically tied to a length of time or a threshold. An Internet service provider might charge one flat fee for Internet access for a month, no matter how much bandwidth is used. Cell phone service providers however, might charge a fixed rate for any amount of minutes used up until a certain level for a month.

The distinguishing aspect of a fixed fee expense is the ability to know for certain what the charge will be. In contract terms, a flat fee for services lets the contractor know in advance how much he will be paid for his services. That amount won’t change, so it is the contractor’s responsibility to conduct the work within the contract budget so he can realize a profit. Fixed fee expenses are the hardest type of expenses to cut or change in a budget because the certainty of a flat fee is often offered in exchange for a guarantee of engagement at that rate over a length of time.

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