Contract Types Overview
Federal contracts come in several distinct types, each allocating risk differently between the government and the contractor. Understanding these types is critical because the contract type determines how you price your work, manage costs, and earn profit. The two major categories are fixed-price contracts and cost-reimbursement contracts, with several variations under each.
Fixed-Price Contracts
Under a Firm Fixed-Price (FFP) contract, the contractor agrees to deliver a defined product or service for a set price regardless of actual costs. If you complete the work under budget, you keep the difference as profit. If costs exceed your estimate, you absorb the loss. FFP contracts carry the most risk for contractors but also the greatest profit potential.
Fixed-Price Incentive Fee (FPIF) contracts include a target cost, target profit, ceiling price, and a share ratio. If the contractor beats the target cost, both parties share the savings. If costs exceed the target, losses are shared up to the ceiling price. Fixed-Price with Economic Price Adjustment (FP-EPA) contracts include provisions for adjusting the price based on established economic indicators like labor indices or material costs.
Cost-Reimbursement Contracts
Cost-Plus-Fixed-Fee (CPFF) contracts reimburse the contractor for all allowable costs plus a fixed fee (profit) that does not vary with actual costs. Cost-Plus-Incentive-Fee (CPIF) contracts add incentive provisions that adjust the fee based on cost performance. Cost-Plus-Award-Fee (CPAF) contracts include a base fee plus an award fee determined by the government's subjective evaluation of contractor performance.
Cost-reimbursement contracts require the contractor to have an adequate accounting system approved by the Defense Contract Audit Agency (DCAA). These contracts place more financial risk on the government but are appropriate when work scope cannot be precisely defined.
Time & Materials and Other Types
Time and Materials (T&M) contracts pay contractors based on fixed hourly labor rates plus actual material costs. They are used when the scope of work is uncertain but the nature of the work is known. Labor Hour contracts are similar but do not include materials.
Indefinite Delivery/Indefinite Quantity (IDIQ) contracts establish an overall contract with minimum and maximum quantities, then issue individual task orders or delivery orders as needs arise. Blanket Purchase Agreements (BPAs) simplify recurring purchases of supplies or services. Government-Wide Acquisition Contracts (GWACs) are pre-competed, multiple-award contracts that agencies across the government can use.