Types of Government Contracts

There are several types of government contracts, and the differences between them are not trivial. Each requires a unique approach to bidding, and a unique approach to performing the work. Understanding the distinct challenges and opportunities of each contract is important for every business interested in selling to the government if that business is to succeed as a government contractor.

The Four Primary Types of Government Contracts

After a government agency determines a need, it conducts program management activities and develops an acquisition strategy. Part of this strategy involves determining which contract type will best serve the government’s needs. Those contract types fall into 4 main buckets:

1. Fixed-price contracts
2. Cost-reimbursement contracts
3. Time and materials contracts
4. Indefinite delivery/Indefinite quantity (IDIQ) Contracts

Guide to Government Contract Types

Learn directly from Deltek’s government contracting industry experts as they examine each of the four different types of government contracts.

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Fixed-price contracts are used by all federal agencies and generally provide a set, firm price. An adjustable price level may sometimes be used for a ceiling price, a target price (including target cost), or both, depending on how it is specified in the contract. Fixed-price contracts are typically used when the contract risk is relatively low, or defined within acceptable limits, and the contractor and the government can come to an agreement on a ceiling price. 

Common Types of Fixed-Price Contracts

• Firm Fixed-Price Contract: This contract provides a price that is not subject to any adjustment.
• Firm Fixed-Price, Level-Of-Effort Contract: This requires the contractor to provide a specified level of effort, over a stated period of time, for a dollar amount fixed by the government.
• Firm-Fixed-Price Materials Reimbursement Type Contract: This contract sets a predetermined price for service and labor; the government will reimburse for the cost of materials.
• Fixed-Price Incentive Contracts: A fixed-price incentive (FPI) contract is a fixed-price type contract with provisions for adjustment of profit.

Cost-reimbursement, sometimes referred to as cost-plus contracts, is a type of contract where a contractor is paid for all of its allowed expenses up to a set limit, plus an amount of additional payment to allow the company to make a profit.

Types of Cost-Reimbursement Contracts

• Cost Contracts: Only the actual costs of completing the contract are covered; the contractor receives no additional fee. Cost contracts are typically used for research and nonprofit work.
• Cost-Sharing Contracts: The contractor agrees to assume part of the contract expenses, and the agency will reimburse the contractor for an agreed-upon portion of those expenses.
• Cost-Plus-Fixed-Fee (CPFF) Contracts: The contractor receives reimbursement plus a predetermined fee that is negotiated when the contract is finalized and will not change based on the actual contract cost. However, the fee may be revised if the work required changes.
• Cost-Plus-Incentive-Fee (CPIF) Contracts: The contractor receives reimbursement plus an adjustable fee. The initial contract will establish targets for cost and fee, as well as a minimum and maximum fee and a formula for fee adjustment. Once the contract is completed, the contractor will be paid based on this formula.
• Cost-Plus-Award-Fee (CPAF) Contracts: The contractor receives reimbursement and a fixed fee, with the potential to earn all or part of an additional fee depending on performance.
• Cost Plus Percentage of Cost (CPPC) Contracts: In these contracts, the seller is paid for all costs incurred, in addition to a percentage of these costs. This type of contract is preferred when it is desirable to shift some of the contract performance’s risk from the contractor to the buyer.

Time and Materials (T&M) contracts present the highest risk to the government and lowest risk to the contractor. These contracts allow government purchasing officials to procure supplies or services on the basis of direct labor hours and actual material costs.

A Time and Materials contract is generally used only when it is not possible to accurately estimate or anticipate the extent or duration of the work being provided by the government contractor. Since these contracts carry a significant amount of risk for the government, federal rules encourage agencies to use other types of contracts.

One of the most prevalent contract types being used by the federal government is the indefinite delivery/indefinite quantity (IDIQ) contract. These contracts can be used on both a fixed-price and cost-reimbursement basis.

When the federal government decides to buy a product or service, it doesn’t always know how many items, or hours of an expert’s time, it will need. Most types of contracts the government uses require it to list exact quantities, so it occasionally needs the flexibility of an IDIQ contract.

IDIQs are often multiple-award contracts, and have become quite popular in recent years. Using an IDIQ contract allows the government to select several possible vendors for a an agency to rely on, then ask that small group of vendors to bid against one another to complete each separate task.