Government Contract Types Explained: FFP, T&M, CPFF & More (2025 Guide)
Complete guide to federal government contract types. Understand Fixed-Price, Time and Materials, Cost-Plus contracts and when each type is used. Learn which contract types are best for your business.
Quick Answer: Main Contract Types
Federal contracts fall into three main categories based on how risk is allocated between the government and contractor: Fixed-Price (contractor bears cost risk), Cost-Reimbursement (government bears cost risk), and Time & Materials (shared risk). The government prefers Fixed-Price when requirements are well-defined.
Contract Type Overview
Understanding contract types is essential because the type determines how you will be paid, what costs you can recover, and how much financial risk you assume. The Federal Acquisition Regulation (FAR) Part 16 defines these contract types.
Risk Spectrum
Why Contract Type Matters
Your profit potential and risk exposure vary dramatically by contract type. On a Fixed-Price contract, every dollar you save goes to your bottom line, but cost overruns come out of your pocket. On Cost-Plus, you are reimbursed for allowable costs but profit is capped.
Fixed-Price Contracts
Fixed-Price contracts set a firm price for defined deliverables. The contractor assumes cost risk: if you finish under budget, you keep the savings; if you go over, you absorb the loss.
Firm-Fixed-Price (FFP)
The most common contract type. Price is set at award and does not change regardless of contractor costs. Maximum contractor risk, but also maximum profit potential.
Best For:
- • Well-defined requirements
- • Commercial or standard items
- • Predictable work scope
Risk:
- • Cost overruns are your loss
- • Scope creep without compensation
- • Must estimate accurately
Fixed-Price Incentive (FPI/FPIF)
Starts with a target cost and target profit. If actual costs differ from target, savings or overruns are shared between contractor and government based on a share ratio.
Example:
Target cost: $1M, Target profit: $100K, Share ratio: 70/30 (govt/contractor). If you complete for $900K, you saved $100K. You keep 30% = $30K extra profit. Total profit: $130K instead of $100K.
Fixed-Price with Economic Price Adjustment (FP-EPA)
Allows price adjustments based on specified economic indices (labor rates, material costs, etc.). Protects both parties from unforeseeable economic changes on long-term contracts.
Fixed-Price Level of Effort (FP-LOE)
Fixed price for a specified level of effort (e.g., hours) rather than specific deliverables. Used when outcomes cannot be predicted but effort can be measured.
Cost-Reimbursement Contracts
Cost-Reimbursement contracts reimburse the contractor for allowable costs incurred plus a fee (profit). The government bears most cost risk. Used when requirements cannot be precisely defined.
Cost-Plus-Fixed-Fee (CPFF)
Government reimburses all allowable costs plus a fixed dollar fee. The fee does not change regardless of actual costs, so there is no incentive to control costs.
Example:
Estimated cost: $1M, Fixed fee: $80K. Whether you spend $900K or $1.1M, your fee stays $80K. Government pays actual costs plus the fixed fee.
Cost-Plus-Incentive-Fee (CPIF)
Similar to CPFF but with incentive provisions. Fee adjusts based on cost performance, delivery, or technical performance. Better cost control than CPFF.
Cost-Plus-Award-Fee (CPAF)
Base fee plus an award fee based on subjective evaluation of performance. Government evaluates contractor periodically and determines award fee amount.
Award fee is typically 0-100% of the available pool based on performance ratings.
Cost Contract (No Fee)
Government reimburses allowable costs only, with no fee. Typically used for research with nonprofit organizations, federally funded R&D centers, or educational institutions.
Cost-Reimbursement Requirements
To receive a cost-reimbursement contract, you must have an adequate accounting system that can track costs by contract. Many small businesses do not have systems that meet government requirements for cost-type contracts.
Time and Materials / Labor Hour Contracts
T&M and Labor Hour contracts pay based on direct labor hours at fixed rates plus materials at cost (T&M) or labor only (Labor Hour). Risk is shared between parties.
Time and Materials (T&M)
Payment = (Labor Hours x Hourly Rate) + Materials at Cost
- • Fixed hourly rates include profit
- • Materials reimbursed at actual cost
- • Ceiling price limits total payment
Labor Hour (LH)
Same as T&M but without materials. Used when work is service-only with no significant material costs.
- • Consulting services
- • Technical support
- • Professional services
When T&M is Used
T&M contracts are appropriate when:
- ✓Requirements cannot be defined precisely
- ✓Scope of work is uncertain
- ✓It is not possible to estimate cost to permit fixed-price
- ✓Adequate cost accounting system not required
Indefinite-Delivery Contracts (IDIQ)
IDIQ contracts establish pre-negotiated terms for an indefinite quantity of supplies or services over a set period. Work is ordered through task or delivery orders.
Indefinite-Delivery, Indefinite-Quantity (IDIQ)
Sets minimum and maximum quantities. Government orders as needed within those bounds. Commonly used for IT services, professional services, and construction.
Single Award vs Multiple Award
Single Award
One contractor receives all orders. Simpler but less competition.
Multiple Award
Multiple contractors compete for each task order. More common for large vehicles.
Common IDIQ Vehicles
Which Contract Type is Best for You?
Contract Type Decision Matrix
| Factor | Fixed-Price | T&M | Cost-Plus |
|---|---|---|---|
| Requirements clarity | High | Medium | Low |
| Your cost risk | High | Medium | Low |
| Profit potential | Unlimited | Fixed rates | Capped |
| Accounting requirements | Basic | Basic | Advanced |
| Admin burden | Low | Medium | High |
Choose Fixed-Price When:
- • Requirements are clear and stable
- • You can estimate costs accurately
- • You want maximum profit potential
- • You have efficient operations
Choose T&M When:
- • Scope cannot be defined upfront
- • Work is service-oriented
- • You want predictable profit margins
- • Level of effort is uncertain
Choose Cost-Plus When:
- • R&D or high uncertainty work
- • You want minimal cost risk
- • You have adequate accounting system
- • Complex, undefined requirements
Frequently Asked Questions
What is the most common contract type?
Firm-Fixed-Price (FFP) is the most common. The government prefers FFP because it transfers cost risk to the contractor and simplifies administration.
Can I choose my contract type?
Usually no. The government determines contract type based on the nature of the requirement. However, you can choose not to bid on contract types that do not fit your business model.
What accounting system do I need for cost-type contracts?
You need a DCAA-adequate accounting system that can accumulate costs by contract, segregate direct and indirect costs, and comply with Cost Accounting Standards if applicable.
What is a ceiling price on T&M contracts?
A ceiling price is the maximum the government will pay. Even on T&M, you cannot bill beyond the ceiling without a contract modification.
Can I lose money on a fixed-price contract?
Yes. If your actual costs exceed the fixed price, you absorb the loss. This is why accurate estimating is critical for FFP contracts.
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