How Many Types of Government Contracts Are There?
Companies that deliver on government contracts usually have to deal with three major contract types. Each contract type can have variations, and may also be referred to as a project type.
Contracting Officers have access to a variety of buying methods, also known as contract vehicles. Common contract vehicles include credit card purchases, Sole Source, and Indefinite Delivery/Indefinite Quantity (IDIQ) contracts. In this blog, we will focus on the three main types of government contracts, examine their highlights, and look into how Costpoint helps at each juncture.
True of all contracts for both commercial and government entities, they center on cost. While the contract types below do not call out the importance of cost pools and cost allocation in general, tracking and allocating costs is critical to staying compliant with Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS), as well as ensuring you are on the trajectory to complete a profitable project.
Costpoint helps teams throughout your company adhere to the contract costing rules by automating the carry-through of the accounting and costing rules established at project set up, whether it is the Accounting Manager working with cost pools, the Project Manager who needs to report on the estimate-at completion (EAC) forecast, or the Procurement Manager who may need to confirm subcontractor costs are properly accounted for.
Government Contract Type #1: Firm-fixed Price Contract (FFP Contracts)
Firm-fixed price contracts incentivize the contractor to control costs and to be efficient with low levels of administration. If the project ends up costing more to deliver than you charged, your bottom line will be negatively impacted. This contract type is indeed one where price adjustments cannot be made due to additional costs the contractor incurred. From the beginning, the Contracting Officer must be able to establish a fair and reasonable price and well-defined specifications.
This contract is commonly used when purchasing commercial products or services. The contracting officer is planning to pay an agreed-upon fixed amount for the agreed upon amount of goods or services.
Costpoint’s Project Management capabilities include advanced project budgeting and estimate-to-complete set up and reporting options, enabling you to structure costs to incorporate indirect costs using specific multipliers to mark up these costs. It will also create and update the latest revised estimate to completion (LREAC) amounts from project budgets.
Remember, there are a number of ways to slice and dice the data. Here is an example of a project analysis dashboard separating out government revenue from commercial revenue.
Costpoint project analysis dashboard separating government revenue from commercial revenue.
Government Contract Type #2: Cost-plus Contracts
This type of cost-reimbursable contract equates to lower risk carried by the contractor. There are three types of cost-plus contracts:
- Cost Plus Fixed Fee (CPFF): There is not an incentive to keep costs down with this type of contract, thus it is not encouraged. Actual costs are reimbursed up to the extent prescribed. The fixed fee is just that, unless scope changes are negotiated.
- Cost Plus Award Fee (CPAF): With this type of contract, you can be rewarded for excellent performance. There are three parts:
- reimbursement of actual cost
- plus a base fee amount fixed at the inception of the contract
- plus an award fee amount that the contract may earn in whole or part during contract performance.
- Cost Plus Incentive Fee (CPIF): This contract type gets a little more complicated with more conditional fees and formulas. According to the Government Contracting for Dummies eBook, “This contract has a fee that is adjusted by formula in accordance with the relationship between the total allowable costs. The final fee is determined in accordance with the formula at the end of the contract, and will exceed the target fee only when total allowable costs are less than the target costs.” There are four components to this as well.
- negotiated target cost
- target fee
- minimum and maximum fee
- fee adjustment formula
Costpoint handles more indirect cost allocation methodologies than any other software solution and provides sophisticated revenue calculations for numerous contract types, including time and materials, fixed price, multipliers, and reimbursable costs. You can discover what is new in Costpoint on this page.
Government Contract Type #3: Time and Material Contracts (T & M Contracts)
This contract type is cut and dry, you work at a negotiated rate you get paid at that rate. Of course there are stipulations. The Government Contracting for Dummies eBook states, “time and material (T&M) contracts provide for payment for direct labor hours worked at specified and negotiated fixed-hour rates (fully loaded rates that include direct labor, indirect costs, and profit) plus any materials at cost and, if authorized at negotiation, indirect costs applicable to the material costs.”
Get your copy of Government Contracting for Dummies here and explore additional types of government contracts you may want to consider taking on.