Federal Contract Types Explained: FFP, T&M, CPFF, and More
Understand every federal contract type — Fixed-Price, Cost-Reimbursement, Time-and-Materials — and learn which pricing arrangement favors small businesses.
The type of contract you sign determines your risk, your profit ceiling, and your accounting obligations. Before you price a proposal or sign a contract, you need to know exactly what type of vehicle you are working with — because each one distributes risk between the government and the contractor differently.
The Federal Acquisition Regulation (FAR Part 16) defines and governs all federal contract types. This guide covers every major contract type, when agencies use each one, and what each means for your business.
The Big Picture: Two Contract Families
All federal contracts fall into two fundamental families:
- Fixed-Price Contracts — You quote a price. The government pays that price. Cost overruns are your problem.
- Cost-Reimbursement Contracts — You bill allowable costs as incurred. The government pays costs plus a fee.
Time-and-Materials (T&M) and Labor-Hour (LH) contracts are a hybrid — fixed labor rates with reimbursable materials.
The government's default preference is fixed-price (FAR 16.103(a)). Agencies must justify using cost-reimbursement or T&M arrangements.
Fixed-Price Contract Types
Firm-Fixed-Price (FFP) — FAR 16.202
The simplest and most common contract type. The price is set at award and does not change regardless of actual costs.
Risk profile: Maximum risk to the contractor. If your costs exceed the contract price, you absorb the loss. If they come in under, you keep the extra profit.
Best for: Well-defined requirements with stable, predictable costs. Commercial products, standard services, and construction with complete specifications.
Accounting requirements: No special accounting system required. Standard commercial accounting is acceptable.
Why contractors like FFP: Profit is uncapped above costs. If you execute efficiently, you can earn margins far above the nominal fee. Minimal government oversight of your cost structure.
Watch out for: Scope creep — if the government expands requirements without a formal modification, you are working for free. Document every change in writing and demand a bilateral modification before performing extra work.
Fixed-Price with Economic Price Adjustment (FP-EPA) — FAR 16.203
Like FFP, but includes a mechanism to adjust the price based on pre-defined economic indicators — usually a published index like the Consumer Price Index (CPI) or a specific commodity price.
Used for: Multi-year contracts where inflation risk is significant (construction, energy, labor-intensive services over 2+ years).
Contractor advantage: Protects you from inflation on long-duration contracts without requiring a full cost-reimbursement arrangement.
Fixed-Price Incentive (FPI) — FAR 16.204
The contract sets a target cost, a target profit, a ceiling price, and a share ratio. If you come in under the target cost, you and the government split the savings according to the share ratio. If you exceed the target cost, you share the overrun.
Formula:
Final Price = Actual Cost + Target Profit + (Target Cost – Actual Cost) × Contractor Share
Example: Target cost $1M, target profit $100K, ceiling $1.3M, 80/20 share (government/contractor). If you come in at $900K: contractor profit = $100K + ($100K × 0.20) = $120K.
Used for: Development contracts where the government wants to incentivize cost control but cannot lock in a firm price due to technical uncertainty.
Fixed-Price with Award Fee (FPAF) — FAR 16.404
A base fixed price plus an award fee pool that the government distributes based on performance evaluations at periodic intervals.
Used for: Service contracts where the government wants to motivate performance quality beyond the minimum contract requirements.
Cost-Reimbursement Contract Types
Cost-reimbursement (CR) contracts pay you your allowable costs plus a fee. They require an approved accounting system — meaning the Defense Contract Audit Agency (DCAA) or your cognizant audit agency must verify your accounting system can accurately track and segregate costs.
Without an approved accounting system, you cannot be awarded cost-reimbursement contracts. For new contractors, establishing this system is a prerequisite.
Cost-Plus-Fixed-Fee (CPFF) — FAR 16.306
The most common cost-reimbursement type. You are paid allowable costs plus a fixed fee agreed upon at contract award. The fixed fee does not change based on actual costs (it may be adjusted if scope changes).
Fee cap (FAR 15.404-4):
- Research and development: max 15% of estimated costs
- Other work: max 10% of estimated costs
Risk profile: Low risk to contractor — the government bears most cost risk. Low profit upside — your fee is fixed regardless of how efficiently you execute.
Used for: Research and development, basic research, studies, and work with highly uncertain scope where fixed pricing is impossible.
Cost-Plus-Incentive-Fee (CPIF) — FAR 16.304
Like CPFF, but the fee varies based on cost performance. A target fee is set with a minimum and maximum. If you beat the target cost, your fee increases (up to the max). If you exceed target cost, your fee decreases (down to the minimum, which can be zero but not negative).
Used for: Development contracts where you want some incentive for cost efficiency but cannot use a fixed-price approach.
Cost-Plus-Award-Fee (CPAF) — FAR 16.305
You receive allowable costs plus a base fee (which may be zero) plus an award fee evaluated by the government at intervals. The award fee is highly subjective and not subject to dispute in the same way as other contract terms.
Used for: Services where performance quality is paramount and hard to quantify in advance — logistics, maintenance, professional services.
Cost Contract — FAR 16.302
You are paid allowable costs with no fee. Used almost exclusively for nonprofit organizations and educational institutions performing research. Rare for for-profit small businesses.
Time-and-Materials (T&M) and Labor-Hour (LH) — FAR 16.601–16.602
Time-and-Materials (T&M)
You bill fixed hourly labor rates (which include overhead, G&A, and profit built in) plus the actual cost of materials (no fee on materials unless negotiated).
Structure:
Contract Price = (Hours × Fixed Labor Rate) + Direct Material Costs
Risk profile: The government bears cost risk on hours. Your labor rate is fixed so you must deliver within that rate or absorb the shortfall. Most T&M contracts have a Not-to-Exceed (NTE) ceiling that caps total government liability.
Accounting requirement (FAR 16.601): Contracting officers must document that no other contract type is suitable. T&M contracts require government surveillance to ensure efficient use.
Best for: IT services, consulting, and professional services where the scope of hours cannot be defined in advance.
Labor-Hour (LH)
Identical to T&M but with no materials component — pure labor billing at fixed rates.
Indefinite Delivery Contract Types
These are not separate pricing types — they are ordering vehicles that use the pricing types above for individual task/delivery orders.
Indefinite-Delivery Indefinite-Quantity (IDIQ) — FAR 16.504
The government establishes a contract with a minimum guaranteed order amount and a maximum ceiling. Task orders are placed against the contract over its life. Each task order has its own pricing type (FFP, T&M, etc.).
Requirements Contract — FAR 16.503
The government commits to ordering all of a specific item from you during the contract period. You must fill every order placed. No minimum quantity guaranteed beyond the first order.
Definite-Quantity Contract — FAR 16.502
A fixed quantity is established at award. The government orders that specific quantity over the performance period. Deliveries are scheduled in advance or on call.
Blanket Purchase Agreements (BPAs) — FAR 13.303
A BPA is not technically a contract — it is a simplified ordering arrangement established against an existing contract (usually a GSA Schedule). The government places call orders against the BPA rather than full solicitations.
For GSA Schedule holders: BPAs reduce transaction costs for recurring purchases. If you hold a GSA Schedule, is a key revenue strategy.
Which Contract Type Should You Prefer?
There is no universal answer, but here is a practical framework:
For most small business service contractors, T&M on a first contract, then FFP as you mature is a common progression. T&M protects you when you do not yet know your cost structure. FFP rewards you once you have it optimized.
Accounting System Requirements by Contract Type
If you are pursuing cost-reimbursement work, engage a GovCon accountant to set up your chart of accounts, indirect rate structure (fringe, overhead, G&A), and timekeeping system before pursuing these contracts. DCAA audits can take 6–12 months; start early.
Key Takeaways
- FFP is the most common type — you bear all cost risk but keep all cost savings as profit.
- Cost-reimbursement contracts (CPFF, CPIF, CPAF) require an approved accounting system and are preferred for uncertain scope.
- T&M bridges the gap — fixed labor rates with reimbursable materials — ideal for professional services with undefined hours.
- IDIQ vehicles use these pricing types for individual task orders and are the backbone of most multi-year service contract programs.
- Your accounting system determines which contract types you are eligible for — invest in proper cost accounting infrastructure early.
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