The contract type decides who carries the risk if the work costs more than expected — and it shapes how you price, how you invoice, and what your accounting system has to prove. Two contracts for identical work can be very different businesses depending on their type. This guide walks the main families.
The big idea: who bears the risk
Contract types sit on a spectrum from contractor bears all cost risk (fixed-price) to government bears most cost risk (cost-reimbursement). Where a contract sits tells you how much estimating precision and cost discipline it demands.
Firm-Fixed-Price (FFP)
You agree to deliver for a set price, period. If it costs more, you eat it; if it costs less, you keep the margin. The contractor bears the cost risk. FFP rewards accurate estimating and efficient delivery, and it’s common for well-defined scopes (products, clearly specified services). Your accounting burden is lighter, but a bad estimate can turn a win into a loss.
Time-and-Materials (T&M) and Labor-Hour (LH)
You bill fixed hourly labor-category rates for hours actually worked, plus materials at cost. Risk is shared — you’re covered for hours worked, but you carry the risk of efficiency and of a ceiling price you can’t exceed without a mod. T&M suits work where the scope is hard to pin down up front. Your rates (and their support) matter directly.
Cost-Reimbursement (Cost-Plus)
The government reimburses allowable costs and pays a fee on top. The government bears most of the cost risk, so these come with the most oversight — an adequate accounting system, allowability rules (FAR Part 31), and often DCAA scrutiny. Variants set the fee differently:
- CPFF (Cost-Plus-Fixed-Fee) — a fixed fee regardless of cost.
- CPIF (Cost-Plus-Incentive-Fee) — fee flexes with cost/performance against targets.
- CPAF (Cost-Plus-Award-Fee) — fee is earned based on subjective performance ratings.
Cost-type work is common for R&D and hard-to-scope efforts, but it’s not for firms without solid cost accounting.
IDIQ and other “umbrella” vehicles
An IDIQ (Indefinite-Delivery/Indefinite-Quantity) isn’t a pricing type — it’s a framework under which the government issues task orders (services) or delivery orders (supplies) over time, each of which can be FFP, T&M, or cost-type. Related structures include BPAs (blanket purchase agreements under a schedule) and GWACs (government-wide acquisition contracts). Winning the IDIQ is a hunting license; the money is in the orders.
What it means for you
- FFP → nail your estimate; margin lives or dies on execution.
- T&M → your labor rates and ceiling management are everything.
- Cost-type → you need an adequate, auditable accounting system before you bid.
- IDIQ → plan for the order-chasing that follows the award.
How PursuitAI helps
PursuitAI classifies opportunities by solicitation and contract structure and carries your labor-category rate card into pricing and Basis-of-Estimate work — so you can size the risk of a given contract type and price it from your real numbers before you commit to bid.
A word of caution
Contract-type rules, fee structures, and accounting requirements are governed by the FAR and can carry significant compliance obligations. This is an overview — confirm the specific type, clauses, and requirements of any solicitation with counsel and a qualified government-contract accountant.