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 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 it 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:

• Fixed-price contracts
• Cost-reimbursement contracts
• Time and materials contracts
• Indefinite delivery/Indefinite quantity (IDIQ) Contracts

Fixed-Price Contracts

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 agree 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 fixed dollar amount set 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 contract with provisions for profit adjustment.

Cost-Reimbursement Contracts

Cost-reimbursement, sometimes referred to as cost-plus contracts, is a type of contract in which a contractor is paid for all allowable expenses up to a set limit, plus an additional amount 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 negotiated at contract finalization, which 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 an additional fee, all or part of it, depending on performance.
• Cost Plus Percentage of Cost (CPPC) Contracts: In these contracts, the seller is paid for all costs incurred, plus a percentage of those costs. This type of contract is preferred when it is desirable to shift some of the contract performance risk from the contractor to the buyer.

Time and Materials Contracts

Time and Materials (T&M) contracts present the highest risk to the government and the lowest risk to the contractor. These contracts allow government purchasing officials to procure supplies or services based on 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.

IDIQ 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 vendors for an agency to rely on, then ask that small group to bid against one another to complete each task.

How to Price Your Bids for Different Contract Types

How do you get to a confident price point in your proposals? Here, we break down tested approaches for pricing bids across the four common contract types.

Fixed-price Contracts

To effectively price these bids, start by analyzing historical data from similar projects. This will provide a baseline for both direct and indirect costs. Incorporate a detailed risk assessment to identify potential financial impacts and include contingency buffers. Protect your profit margins while staying competitive.

Cost-reimbursement Contracts

When pricing these contracts, it's essential to first establish a clear understanding of what constitutes allowable costs per the contract terms. Implement robust tracking processes to ensure you can accurately verify all costs. Beyond this precaution, negotiate the terms of the fee to reflect the risk associated with the project, optimizing your potential return.

Time and Materials Contracts

To price this type of contract effectively, determine accurate labor rates by including wages, benefits, and overhead. For materials, develop a procurement strategy that ensures you get the best value for your money and factor in potential fluctuations in material costs over the project duration. It's also wise to include terms that limit your financial exposure should the project scope be less than anticipated.

IDIQ Contracts 

Because of indeterminate timing and material needs, these contracts can be challenging to price due to their unpredictability.

Start by establishing a solid base price for services or products that can cover variable costs and your desired profit margin over time. Use market analysis to forecast potential demand and scale pricing accordingly. Negotiate flexible terms that allow for pricing adjustments based on changes in scope or scale, ensuring you maintain a margin throughout the contract duration.

Use Technology to Help You Get Your Price Right 

Deltek ProPricer streamlines your pricing development process. The platform enhances the speed, accuracy, and overall quality of your proposal pricing tables and narrative, allowing you to stay responsive and competitive.

Other Government Contract Types You May Have Heard Of

As your organization gains experience in the public sector, you may encounter additional government contract types beyond the four primary types. These additional types of government contracts include GWACs, BPAs, and OTAs:

Governmentwide Acquisition Contracts (GWACs)

A GWAC is a type of contract that allows multiple government agencies to purchase goods or services from a single contract vehicle.

U.S. federal government agencies are increasingly leveraging GWACs to reduce procurement lead time and administrative costs and to achieve economies of scale. GWACs are similar to IDIQs in that they are pre-competed contracts awarded to multiple vendors and available for use by all government agencies.

Blanket Purchase Agreements (BPAs)

A Blanket Purchase Agreement (BPA) is a contract that allows government agencies to meet anticipated, recurring needs for commodities, supplies, or services.

BPAs make it easier for the contractor and buyer to meet recurring needs while using the buyer's full buying power, taking advantage of quantity discounts, saving administrative time, and reducing paperwork.

BPAs are most commonly used for supplies or services that are frequently ordered, like office supplies, janitorial supplies, and cleaning supplies, but in quantities that are not pre-determined in advance.

Other Transaction Authority (OTA)

An Other Transaction Authority (OTA) contract is a type of contract that allows the government to carry out certain prototypes, research, and production projects.

OTA's intention is to give the government the flexibility to adopt and incorporate commercial industry standards and best practices into its award instruments. An important point of distinction is that OTAs are not procurement contracts, grants, or cooperative agreements. Instead, they are a legal instrument leveraged by the federal government.

OTAs are most commonly used for information technology (IT) products and services and provide access to cost-effective, innovative solutions.

Indirect Methods of Government Contracting

Developing experience and establishing your organization's success as a government contractor more often than not means pursuing indirect opportunities rather than bidding directly on government contracts to secure a prime position.

In fact, most companies pursuing work in the public sector get their foot in the door by joining teaming agreements and through subcontracting opportunities. While these are not traditional types of government contracts, they are common methods of earning the opportunity to fulfill the requirements of an awarded government contract and are important tools to understand:

Teaming Agreements

A teaming agreement is an agreement between companies to pool resources to enhance their competitiveness to obtain and perform a government contract. They are generally formed between a company competing for a prime contract and a prospective subcontractor or joint venture.

Teaming agreements generally focus on proposal preparation responsibilities, division of work upon award, the exclusivity of the teaming agreement, and subcontract terms should a subcontract be awarded.

Subcontractor Opportunities

A subcontract generally refers to the practice of a prime contractor assigning or outsourcing components of a government contract's obligations under a separate contract with a third party, who is known as the subcontractor.

A subcontract is a legally binding agreement setting forth the work to be performed, pricing, delivery requirements, flow-down clauses, and procedures for resolving subcontractor disputes.

Government Contract Types in Other Public Sector Markets

US SLED Market

The U.S. SLED government market is large, fragmented, and highly lucrative. It comprises over 100,000 unique government entities spanning state, municipal, county, special district, independent school district, and public college and university levels. 

These entities purchase goods and services valued at nearly $1.5 trillion annually, representing nearly 10% of the United States' GDP. Contract types used in the SLED market are often the same or similar to those used in the U.S. federal market. However, the SLED market often uses its own language, and SLED contracts may go by a different name, such as:

• Planned Future Contracts: Companies pursuing business with SLED governments can often develop government contract leads by studying planned future contracts, allowing them to begin building their pursuit strategy in advance. This lead time can accelerate the development of an understanding of the opportunity's requirements, assemble a project team, and decide whether to bid on a particular project. Having this information helps businesses contact key decision-makers in advance, which can help shape the RFP in their favor.
• Expiring Fixed-Term Contracts: Another common type of government contract that established SLED vendors and suppliers like to monitor is fixed-term contracts. These are a great way to safeguard long-term business plans by enabling the prediction of consistent revenue streams. By identifying expiring fixed-term contracts where you have a good chance of unseating the incumbent supplier, you can build a pipeline of ongoing, consistent work for your business. Networking with decision-makers before the launch of the formal RFP gives your organization a chance to stand out more before the next procurement cycle kicks off.
• Cooperative Contracts: Cooperative purchasing refers to SLED governments making purchases from pre-existing contracts held by a third-party organization, rather than going through a brand-new request for proposals (RFP) process that would otherwise be required. While cooperative purchasing has been around for decades, its popularity among SLED government buyers and sellers has increased significantly in recent years. By buying through this method, individual governments can essentially "pool" their collective purchasing power to access goods and services more quickly and easily, and potentially on more favorable terms than they would otherwise be able to achieve on their own.

Canadian Market

Established government contractors know there are incredible opportunities to serve the public sector outside of the U.S., especially with the Canadian government.

Canada has three primary levels of government: federal, provincial and territorial, and municipal. Public sector procurement spending in Canada is estimated at least $200 billion Canadian Dollars (CAD) annually, or approximately $150 billion U.S. Dollars (USD) at current exchange rates.

Contracting in the Canadian public sector shares many similarities and a common language with contracting in the U.S. Still, there are several types of government contract bid and tender notices to be aware of when pursuing work with Canadian governments, including:

• Advance Contract Award Notice (ACAN): A public notice indicating to the supplier community that a department or agency intends to award a good, service, or construction contract to a pre-identified supplier.
• Invitation to Tender (ITT): Used where selection is based on the lowest price.
• Notice of Proposed Procurement (NPP): A summary of an upcoming solicitation that briefly describes the requirement and provides pertinent information that will assist suppliers in determining their interest in fulfilling the requirement and their ability to successfully meet any key conditions for participating.
• Price and Availability (P&A): A request sent to suppliers for information concerning approximate prices and availability of specific goods or services. Used for program planning or budgetary purposes.
• Request for Information (RFI) or Letter of Interest (LOI): Used when detailed information and feedback are required from suppliers. Such requests may be used to inform future bid solicitations.
• Request for Proposal (RFP): Used when bidder selection is based on best value rather than on price alone.
• Request for Quotation (RFQ): Used to solicit bids for low-dollar value commercial goods and/or services.
• Request for Standing Offer (RFSO): Used to solicit offers for standing offer methods of supply.
• Request for Supply Arrangement (RFSA): Used to solicit arrangements from suppliers for the establishment of supply arrangements.