Government Contract Types Compared: FFP, T&M, Cost-Plus & More

The Federal Acquisition Regulation (FAR Part 16) establishes contract types that allocate risk between the government and contractor differently.

Contract type spectrum:

Contract Type	Contractor Risk	Government Risk
Firm Fixed Price	Highest	Lowest
Fixed Price Incentive	High	Moderate
Time & Materials	Moderate	Moderate
Cost Plus Incentive Fee	Moderate	High
Cost Plus Fixed Fee	Low	Highest

Key principle:

Higher contractor risk = higher potential profit (or loss). Lower contractor risk = lower fee expectations.

How it works:

The government pays a fixed price regardless of contractor costs. If you're efficient, you keep the profit. If you overrun, you absorb the loss.

Characteristics:

• Price agreed upon before work begins
• Contractor assumes all cost risk
• No cost auditing by government
• Incentive for efficiency

When FFP is appropriate:

• Well-defined requirements
• Stable specifications
• Historical cost data available
• Low technical risk

Pricing considerations:

• Include adequate contingency
• Account for all possible costs
• Consider risk premium in fee
• Don't underbid to win

See: Firm Fixed Price Contracts Guide

How it works:

Government pays fixed hourly rates for labor plus actual cost of materials. No fixed total price.

Characteristics:

• Labor rates are fixed (negotiated)
• Hours are variable
• Materials at cost (usually)
• Ceiling price limits government exposure

When T&M is appropriate:

• Scope is uncertain
• Can't define level of effort
• Short-term engagements
• Supplemental staffing

Pricing considerations:

• Compete on labor rates
• Profit is embedded in rates
• Efficient use of hours matters
• Materials handling fees may apply

See: Time & Materials Contracts Guide

How it works:

Government reimburses allowable costs plus a fee. Contractor risk is limited to disallowed costs.

Types of cost-plus:

• CPFF — Cost Plus Fixed Fee (fee doesn't change)
• CPIF — Cost Plus Incentive Fee (fee varies with cost performance)
• CPAF — Cost Plus Award Fee (fee based on subjective evaluation)

When cost-plus is appropriate:

• R&D and experimental work
• High technical uncertainty
• Scope can't be defined
• First-of-a-kind efforts

Pricing considerations:

• Requires adequate accounting system
• Subject to DCAA audit
• Fee is typically lower than FFP profit
• Compete on estimated costs and approach

See: Cost Plus Contracts Guide

How it works:

Like T&M but for labor only — no separate materials billing.

Characteristics:

• Fixed hourly rates
• Variable hours
• All costs in labor rate (no ODCs)
• Ceiling price required

When used:

• Pure services work
• Staff augmentation
• Advisory services
• When materials are minimal/incidental

Pricing:

Since there's no separate materials billing, all overhead and profit must be in the labor rate. Rates may be higher than T&M labor rates for the same roles.

How it works:

Contract establishes terms; specific work ordered through task/delivery orders.

IDIQ variations:

• Single-award IDIQ — One contractor gets all orders
• Multiple-award IDIQ — Multiple contractors compete for orders

Task order types:

Task orders under IDIQs can be any contract type:

• FFP task orders
• T&M task orders
• Cost-plus task orders

Characteristics:

• Minimum and maximum ordering limits
• Period of performance with option years
• Pre-negotiated rates and terms
• Flexibility for government

See: IDIQ Contracts Guide

How it works:

Simplified ordering method for repetitive needs. Establishes terms for future purchases.

Characteristics:

• Not a contract itself
• Simplifies ordering process
• Usually against GSA Schedule or other contract
• May have ceiling but no minimum guarantee

When used:

• Recurring purchases
• Commodity-type items/services
• Simplified acquisition thresholds

See: BPA Agreements Guide

Factors that determine contract type:

• Requirement definition — How well can scope be defined?
• Technical risk — How uncertain is the solution?
• Cost estimating confidence — How accurately can costs be predicted?
• Performance measurement — Can deliverables be specified?

Decision matrix:

Situation	Best Contract Type
Clear requirements, known costs	FFP
Uncertain scope, known rates	T&M or Labor Hour
R&D, high uncertainty	Cost Plus
Variable needs over time	IDIQ
Repetitive small purchases	BPA

Contractor preference:

Contractors often prefer cost-plus (lower risk) while government prefers FFP (cost certainty). Negotiate from a position of understanding both perspectives.