What each contract type is for, how risk is allocated, and which accounting demands each one creates.
Last reviewed on May 12, 2026.
Federal contracting has two largely independent classifications. The pricing arrangement describes how the government pays — fixed price, reimbursement of costs, or a hybrid. The contract structure describes how work is ordered — a definite scope, a series of task orders under a master contract, blanket ordering arrangements, or a government-wide vehicle. Most contracts combine one pricing arrangement with one structure.
The government pays a fixed total price regardless of the contractor's actual costs. The contractor absorbs the risk if costs come in higher than expected and keeps the upside if costs come in lower. FFP is the standard for commercial items and well-defined scopes.
The government and contractor share cost overruns and underruns according to a negotiated formula until a ceiling is reached. Used for complex work where the parties want to share risk and reward.
The government pays labor at fixed hourly rates by labor category, plus materials at cost. T&M has a not-to-exceed ceiling; the contractor is paid only for hours actually worked and materials actually used. Labor-Hour is the same arrangement without materials.
The government pays the contractor's allowable costs plus a fixed fee negotiated at award. The fee does not vary with actual costs. Total cost risk sits primarily with the government.
Variations of cost-reimbursement contracts that adjust the fee based on cost performance (CPIF) or subjective evaluation (CPAF). Both require the same accounting discipline as CPFF, plus additional administration for the fee mechanism.
A family of contract structures rather than a pricing arrangement. See "Contract structures" below.
A single contract for a defined scope, period of performance, and total value. Most one-off federal awards take this form.
A master contract that establishes the framework — terms, conditions, labor categories, pricing structure — but does not commit the government to a specific quantity beyond a minimum. The government issues task orders or delivery orders against the IDIQ during its term. Most major federal vehicles are IDIQs.
A simplified arrangement that lets agencies buy repeatedly from one or more contractors under pre-agreed terms. BPAs can be issued against Schedule contracts or as standalone arrangements. They are particularly useful for recurring low-dollar purchases.
An IDIQ designated for use by multiple agencies, operated by a sponsoring agency or by GSA. GWACs focus on IT and professional services. Examples include SEWP, CIO-SP4, 8(a) STARS III, Alliant 3, and OASIS+.
A pre-negotiated set of contracts available to all federal agencies (and some non-federal entities). Not technically an IDIQ, but functions similarly. See GSA Schedules overview.
A non-FAR vehicle used by DoD and some civilian agencies for prototype development and related research. OTAs offer flexibility and faster award timelines but apply only to specific authorized purposes.
| Contract type | Contractor risk | Government risk | Profit potential | Audit intensity |
|---|---|---|---|---|
| Firm-Fixed-Price (FFP) | High | Low | High (if you control costs) | Low |
| Fixed-Price Incentive (FPI) | Moderate-High | Moderate-Low | Moderate-High | Moderate |
| Time-and-Materials (T&M) | Moderate | Moderate | Moderate | Moderate |
| Cost-Plus-Fixed-Fee (CPFF) | Low | High | Low-Moderate | High |
| Cost-Plus-Incentive-Fee (CPIF) | Moderate-Low | Moderate-High | Moderate | High |
FFP is Firm-Fixed-Price — one price, no adjustment for the contractor's actual costs. CPFF is Cost-Plus-Fixed-Fee — the government reimburses allowable costs and pays a fee negotiated as a fixed dollar amount. CPIF is Cost-Plus-Incentive-Fee — the fee moves up or down according to a formula tied to actual cost against a target. CPAF is Cost-Plus-Award-Fee — a base fee plus an award amount the government determines subjectively against performance criteria. T&M is Time-and-Materials — fixed hourly labor rates times hours worked, plus materials at cost.
There is no fixed ranking of total cost, because all three reimburse the contractor's allowable costs; what differs is the fee mechanism and the administrative burden. CPFF has the lowest administrative overhead and the weakest cost-control incentive, because the fee does not move with performance. CPIF ties fee to a cost-sharing formula, so it creates a genuine incentive to underrun. CPAF carries the highest administrative cost of the three — award-fee boards, evaluation periods, and determination documentation — which is why agencies generally reserve it for work where performance quality is hard to specify in advance.
Not by a simple modification of the pricing line. Changing the contract type restructures the parties' risk allocation, so it is normally handled either as a definitization of an existing undefinitized action, as a negotiated supplemental agreement supported by an updated cost or pricing analysis, or by structuring the follow-on as the fixed-price effort. It is common on multi-year programs for early phases to be cost-reimbursement while requirements are uncertain and later phases to convert to fixed price once the scope is stable — but that conversion is a negotiation, not an administrative change.
Yes, and much federal services work is. FFP fits services where the requirement can be defined by outcome or deliverable — a defined study, a fixed set of maintenance visits, a service level with measurable standards. It fits poorly where the level of effort genuinely cannot be predicted, which is where T&M and cost-reimbursement types exist. As prime, the practical test is whether you can price the work without knowing exactly how many hours it will take: if a bad estimate would erase your margin, an FFP structure is transferring risk you may not be able to carry.
They are the same mechanism with one difference: Labor-Hour contracts cover labor only, with no materials component. Both bill fixed hourly rates against actual hours worked. Both are treated by the FAR as types to be used only when no other contract type is suitable, and both carry a ceiling price the contractor exceeds at its own risk.
Not in the pricing sense. IDIQ describes the contract's structure — an indefinite-delivery vehicle under which the government issues task or delivery orders — while FFP, T&M and the cost-plus family describe how the work is priced. The two dimensions combine: an IDIQ can issue FFP orders, T&M orders, or both. Confusing the two is the most common source of misunderstanding about what a vehicle actually obliges either party to do.
Firm-fixed-price. The contractor absorbs every dollar of cost overrun and keeps every dollar of underrun. Cost-reimbursement types shift cost risk to the government, which is why they come with accounting system requirements, allowability rules, and far more oversight. T&M sits in between: the hourly rate is fixed, so rate risk is yours, but volume risk is largely the government's up to the ceiling.