Contract Types

Person signing contract with pen.

Contract type is a term used to signify differences in contract structure or form, including compensation arrangements and amount of risk (either to the government or to the contractor). Federal government contracts are commonly divided into two main types, fixed-price and cost-reimbursement.

Other contract types include incentive contracts, time-and-materials, labor-hour contracts, indefinite-delivery contracts, and letter contracts. This wide selection of contract types is available to the government and contractors to provide flexibility in acquiring the large variety and volume of supplies and services required by agencies. Contract types vary according to:

  • The degree and timing of the risk assumed by the contractor for the costs of performance
  • The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals

While more than a dozen contract types are described in the Federal Acquisition Regulation (FAR) Part 16External, the table below highlights CDC’s most commonly used contract types.

CDC’s most commonly used contract types
Contract Type Description Applications
Firm Fixed Price (FFP) Contracts Provides supplies or services for a specific price not subject to any adjustment on the basis of the contractor’s incurred costs. This contract type imposes minimum administrative burden. Generally favored because the contractor assumes the risk of increase performance costs. Used for acquiring supplies and services with reasonably definite specifications, and reasonable prices can be established at the outset.
Cost Reimbursement Contracts Provides for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer. This places cost risk on the government. Used only when circumstances do not allow the agency to define its requirements sufficiently to allow for a fixed-price type contract, OR uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.
Cost Contracts (subtype of Cost Reimbursement Contract) A Cost contract reimburses allowable costs up to the specified total awarded amount of the contract in which the contractor receives no fee or profit. Used for research and development work, particularly with nonprofit educational institutions or other nonprofit organizations.
Cost Plus Fixed Fee Contracts

(subtype of Cost Reimbursement Contract)

Provides payment to the contractor for a negotiated fee (profit) that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed. This permits contracting for efforts that might otherwise present too great a risk to contractors, but provides the contractor only a minimum incentive to control costs. Same as stated for Cost Reimbursement contracts AND for example when the contract is for the performance of research or preliminary/ exploration study, and the level of effort required is unknown.
Time and Materials Contracts Acquires supplies or services on the basis of:
  • Direct labor hours at specified fixed hourly rates that include wages, overhead, general expenses, and profit
  • Actual cost for materials including:
    • Direct Materials
    • Subcontracts for supplies and incidental services for which there is not a labor category specified in the contract;
    • Other direct costs (travel, computer usage etc.)
    • Applicable indirect costs. Material handling costs shall include only costs clearly excluded from the labor-hour rate.
Used only when it is not possible at the time of placing the contract to estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. Used only when the contracting officer determines that no other contract type is suitable. When acquiring commercial services, a time-and-materials or labor hours contract may be used only when the award of the contract or order is made using competitive procedures.
Labor Hour Contracts A variation of the Time and Materials contract type, differing only in that materials are not supplied by the contractor. Used only when it is not possible at the time of placing the contract to estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. Used only when the contracting officer determines that no other contract type is suitable. When acquiring commercial services, a time-and-materials or labor hours contract may be used only when the award of the contract or order is made using competitive procedures.
Indefinite-Delivery, Indefinite-Quantity Acquires supplies or services but does not specify a firm quantity that will be issued and delivered during the period of the contract (as delivery orders or task orders). The basic contract specifies the contract types authorized (e.g. Cost Reimbursement or Firm Fixed Price) and each task order will identify the specific contract type utilized. Used when the Government cannot predetermine, above a specified minimum, the precise quantities of supplies or services the Government will require during the contract period and it is inadvisable for the Government to commit itself for more than a minimum quantity. Used when a recurring need is anticipated. There are three types of indefinite-delivery contracts: definite quantity, indefinite quantity, and requirements contracts.

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Page last reviewed: July 13, 2018