Understanding Federal Contract Types

The type of contract determines how a contractor gets paid and how risk is allocated between the government and the contractor. The Federal Acquisition Regulation (FAR Part 16) defines several contract types, each suited to different procurement situations. Choosing the right contract type is one of the most important decisions in the acquisition process.

Fixed-Price Contracts

Fixed-price contracts establish a firm price that the contractor must deliver for, regardless of their actual costs. The contractor bears the risk of cost overruns but also benefits from cost underruns. This type is preferred when the government can clearly define what it needs.

• Firm Fixed-Price (FFP): The most common type. The price does not change unless the scope changes. Ideal for well-defined commercial products and services.
• Fixed-Price Incentive (FPI): Includes a target cost, target profit, ceiling price, and share ratio. The contractor shares in cost savings or overruns within a defined range.
• Fixed-Price with Economic Price Adjustment (FP-EPA): Allows price adjustments based on specific economic indicators like labor rates or material costs. Used for multi-year contracts where costs may fluctuate.

Cost-Reimbursement Contracts

Cost-reimbursement contracts pay the contractor for allowable incurred costs up to a ceiling. The government bears more risk but gains more flexibility. These contracts are used when the scope is uncertain or when research and development is involved.

• Cost-Plus-Fixed-Fee (CPFF): The contractor receives a fixed fee regardless of actual costs. The fee does not change with performance.
• Cost-Plus-Incentive-Fee (CPIF): Includes incentive provisions that reward the contractor for controlling costs, meeting schedule targets, or achieving performance goals.
• Cost-Plus-Award-Fee (CPAF): The contractor earns a base fee plus an award fee based on subjective evaluation of performance by the government.

Time-and-Materials (T&M) Contracts

T&M contracts pay for labor at fixed hourly rates plus actual material costs. They are a hybrid between fixed-price and cost-reimbursement types. The government uses T&M when it cannot estimate the extent or duration of work. FAR requires a ceiling price that the contractor may not exceed without authorization. These contracts require active government monitoring.

Indefinite-Delivery Contracts

Indefinite-delivery contracts provide for an indefinite quantity of supplies or services during a fixed period. They come in three varieties:

• Indefinite-Delivery/Indefinite-Quantity (IDIQ): The government orders varying quantities as needed, with minimum and maximum values. Large IDIQ vehicles like GSA Schedules and GWACs streamline procurement across agencies.
• Requirements Contracts: The contractor fills all the government's actual requirements during the contract period.
• Definite-Quantity Contracts: A definite quantity is delivered on a flexible schedule.

Which Type Is Most Common?

Fixed-price contracts account for the majority of federal contract actions. The government prefers fixed-price when possible because it shifts cost risk to the contractor and simplifies administration. However, cost-reimbursement contracts dominate in dollar value for large defense and R&D programs where requirements are uncertain. You can explore actual spending data on our contractors page and agencies page.

Related guides

For more information about how federal contracts are structured, see our guide on how government contracts work. Businesses looking to bid on contracts should also read our guide on finding contract opportunities.

Federal contract types side-by-side: who bears the risk

The single most useful lens for understanding federal contract types is "who bears the cost risk." Every contract type sits somewhere on a spectrum between full contractor risk (firm-fixed-price) and full government risk (cost-plus-fixed-fee). The closer a requirement is to a routine commercial good or service, the more the government uses fixed-price types. The closer a requirement is to high-uncertainty R&D or first-of-a-kind systems, the more the government uses cost-reimbursement types. The summary below maps the major types in FAR Part 16:

Definitions per FAR Part 16 (acquisition.gov/far/part-16) and DAU Glossary of Defense Acquisition Acronyms and Terms.

Why fixed-price dominates by count but not by dollar

Fixed-price actions vastly outnumber cost-reimbursement actions in the federal procurement system, but cost-reimbursement programs typically out-spend them on a dollar basis because they cluster in expensive R&D and major weapon programs. A single cost-plus development contract for a next-generation aircraft program can run higher than ten thousand small firm-fixed-price orders for office supplies, IT services, or routine maintenance. This dual-distribution explains why a Pareto analysis of federal procurement data always shows a small number of cost-plus actions dominating the dollar totals while fixed-price actions dominate the count.

Why "commercial item" determinations matter for contract-type choice

FAR Part 12 establishes a streamlined procurement pathway for "commercial items" - goods or services that are also sold to the general commercial market in comparable form. When a contracting officer determines that a requirement qualifies as a commercial item, the contracting type strongly defaults to firm-fixed-price and many traditional federal procurement clauses are waived. This designation matters because it shifts the cost-accounting and compliance burden of the contract substantially toward what commercial markets already produce. Disputes between contractors and agencies about whether a requirement should be procured as a commercial item are among the most consequential pre-award decisions a program faces, because the determination locks in not only the contract type but the entire compliance regime the contractor will operate under for the life of the contract.

When the government prefers each type, by program phase

A common pattern across major federal programs is for the contract type to shift as the program matures. In the technology-maturation and risk-reduction phase, agencies typically use cost-plus-fixed-fee or cost-plus-incentive-fee because requirements are still evolving and forcing the contractor to bear cost risk would either eliminate viable bidders or cause unrealistic bids. Once the design is stable and unit costs become predictable, agencies transition to fixed-price-incentive contracts that share cost-overrun risk while preserving some upside for the contractor on cost-savings performance. In full-rate production and sustainment, agencies push toward firm-fixed-price because the contractor is repeating an established product whose cost the agency can estimate confidently. This phase-aware approach is codified in FAR Part 16 and is one of the core lenses procurement analysts use to assess whether an agency is using the appropriate contract type for the maturity of a given program.

Worked example: an IDIQ vehicle with mixed delivery-order types

A federal civilian agency awards a five-year Indefinite-Delivery, Indefinite-Quantity (IDIQ) IT services contract with a $500 million ceiling to a multiple-award pool of six vendors. Individual task orders issued against the IDIQ can use any contract type the contracting officer determines is appropriate. Over the life of the IDIQ the agency issues roughly 80 task orders. About 65 of those task orders are firm-fixed-price for predictable maintenance and software-licensing work (totaling about $180 million in obligations). Another 10 task orders are time-and-materials for variable-scope migration projects (about $90 million). The remaining 5 task orders are cost-plus-fixed-fee for software development where requirements are evolving (about $130 million). The IDIQ vehicle has therefore obligated about $400 million of its $500 million ceiling, spread across three distinct contract types, each chosen to match the risk profile of the underlying work. This mixed-type pattern is typical of large multiple-award IDIQs and explains why aggregating obligations by contract type at the parent-vehicle level can be misleading without drilling into task-order detail.