Procurement9 min read

Federal Contract Types Explained: FFP, T&M, and Cost-Reimbursement

The contract type is one of the most consequential lines in any solicitation, because it decides who carries the risk if the work costs more than expected. FAR Part 16 lays out a spectrum that runs from firm-fixed-price, where the contractor owns all cost risk, to cost-reimbursement, where the government owns most of it. Knowing the type before you bid tells you how to price, how you will get paid, what accounting system you need, and how much overrun could cost you. This guide walks through the major types and what each means in practice.

The Risk Spectrum at a Glance

Every federal contract type sits somewhere on a single axis: how cost risk is allocated between the government and the contractor. At one end, firm-fixed-price puts all of it on you. At the other, cost-plus-fixed-fee puts almost all of it on the government. FAR 16.103 directs contracting officers to select the type that places a reasonable degree of cost responsibility on the contractor given the uncertainty of the requirement. The more well-defined the work, the more the government pushes toward fixed-price; the more uncertain, the more it accepts cost-type arrangements. Understanding where a requirement falls on that spectrum is the first step in pricing it.

Firm-Fixed-Price (FFP)

Governed by FAR 16.202, an FFP contract sets one price that does not change with your actual cost. It is the government’s default for commercial items and clearly defined requirements because it demands the least oversight and places maximum incentive on the contractor to control cost and perform efficiently. The flip side is that you absorb every overrun. If labor turns out harder than scoped or materials spike, the loss is yours. Variants include fixed-price with economic price adjustment (FAR 16.203), which allows defined price changes for volatile material or labor costs, and fixed-price incentive (FAR 16.403), which shares cost savings and overruns against a target. Bid FFP only when you can estimate the work with confidence and price in a deliberate risk buffer.

Cost-Reimbursement Contracts

Under FAR Subpart 16.3, cost-reimbursement contracts pay your allowable, allocable, and reasonable costs up to an estimated ceiling, plus a fee. They are used when the requirement is too uncertain to set a fair fixed price, such as R&D or complex development. Key flavors include:

Cost-plus-fixed-fee (CPFF) — a negotiated fee that stays constant; minimal cost-control incentive, common in research
Cost-plus-incentive-fee (CPIF) — fee adjusts up or down by a share ratio against a target cost, within a fee band
Cost-plus-award-fee (CPAF) — fee is earned subjectively based on periodic government evaluation of performance

Because the government bears most of the cost risk, FAR 16.301-3 bars award unless the contractor has an accounting system adequate to determine costs — which is where DCAA compliance becomes non-negotiable.

Time-and-Materials and Labor-Hour

A time-and-materials contract (FAR 16.601) pays fixed hourly labor-category rates plus materials at cost. A labor-hour contract is the same without the materials component. FAR explicitly calls T&M the least preferred type because it gives the contractor no incentive to control hours — more hours mean more revenue. As a result, the contracting officer must execute a determination and findings that no other type is suitable, set a ceiling price the contractor exceeds at its own risk, and provide appropriate surveillance. T&M is common for support services where the level of effort is hard to predict, and it frequently appears as one CLIN type within a broader mixed-type contract.

How Contract Type Shapes Your Bid

The type dictates the entire shape of your cost volume. On FFP work you build a confident bottom-up estimate and add risk margin, because you own the outcome. On cost-type and T&M work the government evaluates your actual rates and the realism of your estimate — your indirect rate structure and wrap rate drive both price and credibility, and cost realism analysis may push your evaluated cost upward to the government’s most probable cost. Many vehicles mix types across CLINs, so read each one before you price it. For the mechanics of building a defensible cost volume, see our guide on how to price a federal proposal.

How GovCon Helps

GovCon helps you read a solicitation’s CLIN structure, capture the contract type for each line, and keep your pricing assumptions and narrative aligned with the type the government chose. Pair it with a sound rate structure and you can respond to FFP, T&M, and cost-type opportunities without rebuilding your approach each time. Try GovCon free → or browse the tools built for federal proposal teams.

Frequently Asked Questions

What is a firm-fixed-price (FFP) contract?

A firm-fixed-price contract, governed by FAR 16.202, sets a single price that does not change regardless of the contractor’s actual cost to perform. The contractor bears full cost risk: if you spend less than you bid, you keep the difference; if you overrun, you absorb the loss. FFP is the government’s preferred type for commercial items and well-defined requirements because it places maximum responsibility on the contractor and requires the least oversight.

When does the government use cost-reimbursement contracts?

Cost-reimbursement contracts (FAR Subpart 16.3) are used when requirements are uncertain enough that a fair fixed price cannot be set — typically research and development, complex services, or early-stage system development. The government reimburses allowable, allocable, and reasonable costs up to an estimated ceiling and pays a fee on top. Because the government bears most of the cost risk, FAR 16.301-3 requires the contractor to have an adequate accounting system before award.

What is the difference between CPFF and CPIF contracts?

Both are cost-reimbursement. Cost-plus-fixed-fee (CPFF) pays a negotiated fee that stays constant regardless of actual cost, so it offers the contractor little incentive to control cost. Cost-plus-incentive-fee (CPIF) ties the fee to a target cost using a share ratio — if you come in under target you earn more fee, if you overrun you earn less, within a minimum and maximum fee band. CPIF is used when cost control can be meaningfully incentivized.

Why is time-and-materials considered risky for the government?

Under a time-and-materials contract (FAR 16.601) the government pays fixed hourly labor rates plus materials at cost, with no ceiling on the contractor’s profit per hour and no built-in incentive to finish efficiently — more hours simply mean more revenue. FAR calls T&M the least preferred type and allows it only after a determination and findings that no other type is suitable, with a ceiling price and active government surveillance.

Can a single contract use more than one contract type?

Yes. Many IDIQ vehicles and large services contracts mix types at the CLIN or task-order level — for example FFP CLINs for defined deliverables, T&M CLINs for surge or ad-hoc support, and cost-reimbursable CLINs for travel and other direct costs (ODCs). Reading each CLIN’s type is essential, because it dictates how you build that portion of your cost volume and how you will invoice.

How does contract type affect how I price a proposal?

On FFP work you price to a confident estimate plus a risk buffer, because you own every overrun. On cost-reimbursement and T&M work the government scrutinizes your rates directly, so your indirect rate structure, wrap rate, and the realism of your estimate drive evaluation. Cost realism analysis applies to cost-type contracts, where the government may adjust your proposed cost upward to its own most probable cost estimate.

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