There are three primary types of government contracts: fixed price, cost reimbursable and time and materials. Fixed price contracts have a negotiated price that remains the same over the life of the contract so the amount you will be paid remains the same. Cost reimbursable contracts involve the government paying for the actual cost to complete the work. Cost reimbursable contracts have a variety of schemes for providing a fee or profit to the contractor. Time and materials contracts have agreed to rates for labor and materials that do not change over the contract and are billed as incurred. Time and materials contracts can have annual escalation rates incorporated in them to reflect increasing costs.
Cost Plus Incentive Fee (CPIF)
A cost plus incentive fee contract is one where the vendor is reimbursed for costs incurred plus fee based on a formula tied to costs. The fee formula can vary and is normally designed to encourage the contractor to keep costs down.
Cost Plus Award Fee (CPAF)
A cost reimbursement contract where the objectives of the contract are determined to be completed by subjective means. The contractor receives reimbursement for their costs plus the award fee. Cost plus award fee contracts can not be used when cost plus fixed fee or cost plus incentive fee contract would be more appropriate.
Cost Plus Fixed Fee (CPFF)
A cost plus fixed fee contract reimburses the contractor for the cost incurred to complete the work plus a negotiated fixed fee. The fee does not change based on cost of the work. Cost is calculated based on actual amounts paid for labor and materials plus fringes, overhead and general and administrative rates. Fringe, overhead and general and administrative rates are computed annually and reflect the actual corporate costs. Many government contracts are cost reimbursable.
Firm Fixed Price or FFP contracts have detailed requirements and a price for the work. The price is negotiated before the contract is finalized and does not vary even if the contractor needs to expend more or less resources than planned. Firm fixed price contracts require the contractor to manage the costs of the work in order to make a profit. If more work than planned is required then the contractor may lose money on the contract unless a contract modification is obtained. Firm fixed price contracts can also be more profitable if costs are closely managed.
Fixed Price Contract With Incentive Fee Target (FPIF)
The fixed price contract with incentive fee contract is a firm fixed price type contract (as compared to a cost reimbursable). The fee can vary depending on whether the contract comes in above or below planned cost. These contracts do contain a ceiling price to limit the government's exposure to cost overruns.
Fixed Price With Economic Price Adjustment
Fixed price with economic price adjustment contracts are fixed price contracts but they contain a provision to account for contingencies and changing costs. An example is the contract may contain an adjustment for an annual salary increase.
Time & Materials contracts have rates negotiated before contract award for the cost by labor category and materials. As work is completed the contractor bills against the rates agreed to in the contract regardless of the actual cost.
Know which contract type is planned in advance of submitting a proposal as well as during contract negotiations. Knowing the contract type allows you to plan the project and how best to manage it for success. Before a company can get a cost reimbursable contract it must have an approved accounting system.