Federal Contracting Glossary
Cost-Reimbursement vs. Fixed-Price
The two principal federal contract-type families — paying allowable costs plus a fee versus a firm agreed price — which allocate cost risk very differently.
Definition
Federal contracts fall along a spectrum. A firm-fixed-price (FFP) contract sets a price that does not change with actual costs, placing cost risk on the contractor and rewarding efficiency. A cost-reimbursement contract (such as cost-plus-fixed-fee) reimburses allowable, allocable, reasonable costs plus a fee, placing cost risk on the government and suiting work whose scope cannot be defined precisely up front.
Between these sit hybrids — time-and-materials, labor-hour, and incentive types. Contract type drives how you price and what systems you need: cost-reimbursement and T&M work generally require an adequate, often DCAA-auditable accounting system, which many new contractors lack.
How this affects your proposal
Confirm the contract type before you price — FFP rewards a sharp efficient price, while cost-reimbursement and T&M require an adequate cost-accounting system and well-supported rates.
Common questions about cost-reimbursement vs. fixed-price
Which contract type carries the most risk for the contractor?
Firm-fixed-price puts the most cost risk on the contractor, because the price is fixed regardless of actual costs. Cost-reimbursement shifts cost risk to the government but requires an auditable accounting system.
Do I need a special accounting system for cost-type contracts?
Generally yes. Cost-reimbursement and T&M contracts require an accounting system adequate to track and bill costs by contract — often subject to DCAA review. Firms without one usually start on fixed-price work.
Related terms
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