Government contract types explained

Federal contracts come in several types, each with different structures for pricing, risk allocation, performance obligations, and payment. Understanding the contract type associated with an opportunity is essential before committing to a response — it affects how you price, how you manage risk, and how you get paid.

Fixed-price contracts

Firm Fixed Price (FFP) — The most common contract type in federal contracting. The government pays a fixed price regardless of what it costs the contractor to perform the work. All cost risk rests with the contractor. If your costs come in lower than anticipated, you keep the difference. If they come in higher, you absorb the loss. FFP contracts are most appropriate when the scope of work is well-defined and the contractor can accurately estimate costs.

Fixed-Price Incentive (FPI) — A fixed-price contract with an incentive structure that allows the government and contractor to share cost savings or overruns relative to a target cost. Used when the scope is mostly defined but some cost uncertainty exists.

Fixed-Price with Economic Price Adjustment (FP-EPA) — Allows for price adjustments based on specified economic conditions (inflation, material cost changes). Used for longer-term contracts where cost conditions may change significantly.

Cost-reimbursement contracts

Cost Plus Fixed Fee (CPFF) — The government reimburses the contractor's allowable costs plus a fixed fee (profit). The cost risk shifts primarily to the government. Used when the scope of work is not fully defined or costs are difficult to predict. Requires more robust cost accounting systems from the contractor.

Cost Plus Award Fee (CPAF) — Similar to CPFF but with a performance-based award fee in addition to a base fee. The award fee is determined by the government's assessment of contractor performance against criteria established in the contract.

Cost Plus Incentive Fee (CPIF) — Cost reimbursement with an incentive structure that rewards the contractor for coming in under target cost or meeting performance milestones.

Time and materials contracts

Time and Materials (T&M) — The government pays for hours worked at negotiated labor rates plus the actual cost of materials. The government bears significant cost risk because there is no ceiling on hours without contract modifications. T&M contracts are used when the scope of work cannot be adequately defined in advance. They typically include a not-to-exceed ceiling on the total contract value. For small businesses, T&M contracts are common in IT and professional services.

Labor Hour (LH) — Similar to T&M but materials are not included. Used when the work is primarily labor-based and material costs are minimal.

Indefinite delivery contracts

Indefinite Delivery Indefinite Quantity (IDIQ) — A contract vehicle that establishes a maximum ceiling value and a minimum guaranteed value. Actual work is ordered through task orders or delivery orders issued during the contract period. IDIQ contracts allow agencies to order services as needs arise without conducting a new full competition for each requirement. Many government-wide and agency-specific contract vehicles are IDIQs.

Winning a spot on an IDIQ vehicle does not guarantee revenue — it only provides the right to compete for task orders. Task order competitions can be very competitive among the multiple IDIQ awardees.

Blanket Purchase Agreement (BPA) — A simplified acquisition tool that allows repetitive purchases of supplies or services from pre-selected vendors. BPAs simplify the ordering process by establishing basic terms and pricing in advance. They are particularly common for commercial items and services under simplified acquisition thresholds.

Which contract type matters for your bid

The contract type affects your proposal in several ways:

• Pricing approach — FFP requires a firm price; T&M requires labor rates; cost-type contracts require estimated costs and a fee proposal
• Accounting system requirements — Cost-type contracts may require an approved accounting system capable of tracking and billing allowable costs per government regulations
• Risk tolerance — FFP requires confident cost estimating; T&M and cost-type contracts transfer more risk to the government but require more administrative tracking
• Business systems — Higher-value cost-type contracts may require business systems compliant with government auditing requirements