Federal Contract Types Explained
Updated April 2026 · Cost-plus vs. fixed-price vs. T&M
The type of contract determines who bears the risk — the government or the contractor — and directly affects how taxpayer dollars are spent. Understanding contract types is essential for evaluating whether the government is getting a good deal. Here's how each type works.
Contract Type Comparison
| Type | Risk Bearer | Best For | Concern |
|---|---|---|---|
| Firm-Fixed-Price (FFP) | Contractor | Well-defined requirements | Contractor may cut corners |
| Cost-Plus-Fixed-Fee (CPFF) | Government | R&D, uncertain scope | No incentive to control costs |
| Cost-Plus-Incentive-Fee (CPIF) | Shared | Large development programs | Complex fee calculations |
| Cost-Plus-Award-Fee (CPAF) | Government | Performance-sensitive work | Subjective fee decisions |
| Time & Materials (T&M) | Government | Undefined scope, support | Open-ended cost exposure |
| IDIQ | Varies by order | Recurring, variable needs | Task order competition varies |
Firm-Fixed-Price (FFP)
The most common and generally preferred contract type. The contractor agrees to deliver a specific product or service at a set price. If costs exceed the price, the contractor absorbs the loss. If costs are lower, the contractor keeps the savings as additional profit.
When used: Commercial products, commodities, services with clear requirements, and any situation where the government can precisely define what it needs.
Example: A contract for 100 laptop computers at $1,200 each. The contractor delivers exactly what was specified at the agreed price.
Cost-Plus Contracts
Cost-plus contracts reimburse the contractor for allowable costs plus a fee. The government audits costs to ensure they're reasonable and allocable. There are three main variants:
Cost-Plus-Fixed-Fee (CPFF)
The fee is a fixed dollar amount agreed upfront and does not change regardless of actual costs. Used for study, analysis, and basic research where effort is unpredictable. The contractor has minimal incentive to control costs since the fee is locked.
Cost-Plus-Incentive-Fee (CPIF)
Includes a target cost, target fee, minimum and maximum fee, and a share ratio. If actual costs are below target, the contractor earns a higher fee. If above, the fee decreases. This creates a shared incentive to manage costs. Common in major defense programs.
Cost-Plus-Award-Fee (CPAF)
The government evaluates contractor performance periodically and awards a fee based on that evaluation. Up to 100% of the available award fee can be earned for excellent performance. Used when performance quality matters more than cost.
Time and Materials (T&M)
Pays for labor hours at specified rates plus materials at cost. No ceiling on total cost unless one is specified. The FAR requires a determination that no other contract type is suitable before using T&M.
When used: Maintenance support, IT help desk, consulting when scope can't be predicted.
Risk: Without oversight, T&M contracts can balloon as contractors add hours without clear deliverables.
IDIQ Contracts
Indefinite Delivery/Indefinite Quantity contracts are framework agreements. The government establishes the contract, then issues individual task orders as needs arise. Major government-wide IDIQ vehicles include:
- GSA Schedule (MAS) — Pre-negotiated pricing for commercial products and services
- OASIS/OASIS+ — Professional services for complex requirements
- CIO-SP3/CIO-SP4 — IT solutions for NIH and other agencies
- Alliant 2/3 — IT services for all agencies
- SEWP — IT products through NASA
Which Type Is Best for Taxpayers?
Generally, fixed-price contracts are best for taxpayers when requirements are clear — the contractor bears risk and has incentive to be efficient. Cost-plus contracts are appropriate for genuine uncertainty (R&D, first-of-a-kind systems) but require vigilant government oversight. The worst outcomes come from poorly managed T&M contracts or cost-plus contracts where the government doesn't audit costs.
Frequently Asked Questions
What is a cost-plus government contract?
A cost-plus contract reimburses the contractor for all allowable costs incurred in performing the work, plus a fee (profit). The government bears the risk of cost overruns. Cost-plus contracts are used when the scope of work is uncertain or for research and development. The fee can be fixed (CPFF), incentive-based (CPIF), or award-based (CPAF). Critics argue cost-plus contracts incentivize spending since the contractor profits more as costs increase.
What is a fixed-price government contract?
A firm-fixed-price (FFP) contract sets a total price that does not change regardless of the contractor's actual costs. The contractor bears the risk — if costs exceed the fixed price, the contractor absorbs the loss. FFP contracts are preferred by the government when requirements are well-defined and costs are predictable. They represent the majority of federal contract dollars.
What is a time-and-materials contract?
A time-and-materials (T&M) contract pays the contractor based on labor hours at specified rates plus materials at cost. It combines elements of cost-plus (no ceiling on hours) and fixed-price (fixed labor rates). T&M contracts are used when the scope of work can't be clearly defined upfront, like IT support or consulting. They require careful government oversight to control costs.
What is an IDIQ contract?
An Indefinite Delivery/Indefinite Quantity (IDIQ) contract establishes a framework for future orders without committing to specific quantities upfront. The government issues task orders or delivery orders as needs arise. IDIQs have a minimum and maximum value and a base period with option years. Major IDIQ vehicles include GSA Schedule, OASIS, and CIO-SP3.
What is a sole-source contract?
A sole-source contract is awarded to a single company without competitive bidding. The FAR allows sole-source awards when only one company can meet the requirement, in cases of unusual and compelling urgency, for international agreements, or when authorized by statute. Sole-source contracts are scrutinized because they bypass competition, which normally drives down costs.