Government Contract Types Explained

The most common contract type. The contractor agrees to deliver a defined product or service for a fixed total price. If costs exceed the price, the contractor absorbs the loss. If costs are below the price, the contractor keeps the profit. FFP is preferred by the government when requirements are well-defined, specifications are clear, and there is adequate price competition. It requires minimal government cost oversight and no DCAA audit of contractor costs.

A fixed-price contract that includes a mechanism for adjusting the price based on specified economic indices (such as labor cost indices, material cost indices, or published catalog prices). Used for long-term contracts where cost factors are expected to change over the period of performance. The adjustment formula is defined in the contract and triggered automatically, reducing the contractor's risk from uncontrollable economic changes.

Establishes a target cost, target profit, a profit adjustment formula (share ratio), and a ceiling price. If the contractor delivers below target cost, the savings are shared between the government and contractor per the share ratio (e.g., 60/40). If costs exceed the target, the overrun is also shared, but the contractor's total price cannot exceed the ceiling. Above the ceiling, the contractor absorbs all costs. Used for development and production contracts where cost uncertainty exists but is bounded.

A fixed-price contract with an additional award fee pool that the contractor can earn based on subjective evaluation of performance. The base price covers the work; the award fee (typically 5-15% of base price) rewards exceptional performance in areas like quality, timeliness, and customer satisfaction. The government evaluates performance periodically and determines the earned fee. This type is rarely used because it combines fixed-price risk with subjective evaluation.

Requires the contractor to provide a specified level of effort (typically measured in labor hours) over a fixed period for a fixed price. Unlike a typical FFP where the contractor delivers a defined outcome, FP-LOE pays for the effort regardless of outcomes. Used for research, advisory, and investigation activities where the work cannot be defined in terms of deliverables. The contractor is paid the fixed price as long as the required hours are delivered.

The government reimburses all allowable costs and pays a fixed fee (profit) that does not vary with actual costs. The fee is negotiated at the start and remains constant regardless of whether costs come in over or under the estimate. CPFF is the most common cost-reimbursement type, used when the scope of work is defined but costs cannot be estimated with sufficient accuracy for a fixed-price contract. There are two forms: completion (deliver a defined end product) and term (deliver a defined level of effort for a fixed period).

Reimburses allowable costs and pays a fee that adjusts based on the relationship between actual costs and a target cost. A target cost, target fee, minimum and maximum fee, and fee adjustment formula are negotiated at the outset. If costs are below target, the contractor earns a higher fee. If costs exceed target, the fee decreases but never below the minimum. CPIF motivates cost control while protecting the contractor from catastrophic loss.

Reimburses allowable costs and provides a base fee (usually small) plus an award fee pool that is earned based on periodic government evaluation of performance. Award fee determinations consider quality, timeliness, technical ingenuity, and cost management. The award fee board meets periodically (quarterly, semi-annually) and assigns a rating that determines the percentage of the award fee pool earned for that period. CPAF is used for complex services where the government wants to incentivize exceptional performance beyond mere compliance.

The contractor receives no fee and is reimbursed for only an agreed-upon portion of allowable costs. Used primarily for research and development where the contractor expects to benefit commercially from the results. The contractor's contribution represents its expected commercial value from the work. Common in university research contracts and cooperative agreements where the results have dual-use potential.