Every federal contract has a type, and the type shapes almost everything about how the work is priced, managed and paid. Before you price a proposal or sign a contract, understand which type you are dealing with and what risks it places on your firm.
The FAR describes contract types in detail, and the wording is being revised as part of an ongoing rewrite, so check acquisition.gov for the current text. The basics below have been stable for a long time.
Fixed-price contracts
In a firm-fixed-price (FFP) contract, the contractor agrees to deliver the specified work for a set price. If the work costs more than expected, the contractor generally absorbs the difference. If it costs less, the contractor keeps the savings. This places the most cost risk on the contractor and the least administrative burden on both parties.
Fixed-price contracts work best when requirements are well defined and costs can be estimated with reasonable confidence. They are the preferred type for commercial products and services. Variations include fixed-price contracts with economic price adjustment, which allow certain prices to change based on specified factors, and fixed-price incentive contracts.
Cost-reimbursement contracts
In a cost-reimbursement contract, the government pays allowable, allocable and reasonable costs, up to a ceiling, plus a fee in many cases. Common forms include cost-plus-fixed-fee, cost-plus-incentive-fee and cost-plus-award-fee.
These contracts are used when uncertainty makes fixed pricing impractical, such as in research and development. They shift much of the cost risk to the government, but they come with significant requirements for the contractor. Generally, you need an accounting system adequate for determining costs, and you must follow the cost principles that determine which costs can be charged. Audits and close government oversight are common.
Time-and-materials and labor-hour contracts
A time-and-materials (T&M) contract pays fixed hourly rates for labor, which include wages, overhead, general and administrative expenses and profit, plus the cost of materials. A labor-hour contract is similar but without materials. These contracts are used when it is not possible to estimate the extent or duration of work accurately at the outset.
Because the contractor has limited incentive to control the number of hours, the government is expected to monitor performance closely. T&M contracts generally include a ceiling price that the contractor exceeds at its own risk.
Indefinite-delivery contracts and orders
Many contracts are indefinite-delivery vehicles, such as IDIQs, under which the government issues task or delivery orders. Each order also has a contract type. An IDIQ might allow fixed-price orders for some work and T&M orders for other work, so read each order carefully.
What this means for your proposal
- On fixed-price work, price contingencies thoughtfully and define assumptions clearly.
- On cost-type work, confirm your accounting system and indirect rate structure can meet requirements.
- On T&M work, make sure your labor categories and qualifications match the solicitation.
Choosing to bid on a cost-type contract is a significant business decision. If you have questions about accounting requirements, talk to an accountant experienced in government contracting.