A Comprehensive Primer on Contract Types for Federal Government Contractors

The consideration of contract types in federal government contracting emphasizes the necessity and complexities of selecting the right contract to suit specific goals and manage risks efficiently. Contract types include fixed-price, cost-reimbursement, incentive, indefinite-delivery, time-and-materials, labor-hour, letter contracts, and basic ordering agreements. Each of these contract types serves a specific function and can be used in a variety of scenarios depending on the nature of the job, the level of risk, and the specific procurement needs.

There are various key factors to consider while selecting contract types. A contracting officer (CO) must first determine if any statutory or regulatory constraints apply to the specific contract type in question. For example, in sealed bidding competitions, only firm-fixed-price or fixed-price with economic price adjustment contracts are allowed. The CO should also thoroughly review the Statement of Work (SOW), contract specifications, and deliverables. Furthermore, the government prefers to acquire commercial products or services when they are available, and only particular contract types are appropriate for these procurements. FAR 16.104 sets forth 12 factors a CO should consider before selecting a contract type, emphasizing the need to balance risk between the government and the contractor. These factors include price competition, cost analysis, the type and complexity of the requirement, urgency, the contractor’s technical capability and financial responsibility, and the adequacy of the contractor's accounting system.

Fixed-price contracts are commonly used in government procurement and include firm-fixed-price (FAR 16.202), fixed-price with economic price adjustments (FAR 16.203), fixed-price incentive (FAR 16.204), fixed-price with prospective price redetermination (FAR 16.205), fixed-ceiling-price with retrospective price redetermination (FAR 16.206), and firm-fixed-price level of effort contracts (FAR 16.207). Firm-fixed-price contracts, which do not allow for price negotiations beyond the initial agreement, impose the most cost risk on the contractor. Fixed-price contracts with economic price modifications allow for price updates in response to certain economic events, such as increases in material or labor prices and apply only to specifically identified areas. Fixed-price incentive contracts adjust the ultimate price depending on performance, but fixed-price contracts with prospective and retroactive price redetermination permit price changes during or after contract performance. Firm-fixed-price level of effort contracts are used to buy services for a set number of hours.

Cost-reimbursement contracts, which compensate the contractor for costs as long as they are “allowable,” are classified as cost-only, cost-sharing, cost-plus-incentive fee, cost-plus-award fee, and cost-plus-fixed-price contracts (FAR 16.301). Cost-only contracts are largely utilized for R&D, with the contractor reimbursed without any profit. Cost-sharing contracts (FAR 16.303) include the government covering a portion of the expenditure while the contractor bears the financial risk. Cost-plus-incentive-fee contracts (FAR 16.304) feature both a target cost and a charge, as well as cost-management incentives. Cost-plus-award-fee contracts (FAR 16.305) include an award fee based on performance evaluation, whereas cost-plus-fixed-fee contracts 9FAR 16.306) include a fixed charge agreed upon at the outset that is only altered for scope adjustments. The federal government generally does not like to use this contract type as it places the greatest amount of financial risk on the government.

Incentive contracts include additional procedures and criteria for awarding and carrying out contracts that include performance-based rewards. The processes for these contracts are defined in FAR 16.4, which supplements the other subparts that detail the specific incentive kinds.

Indefinite-delivery contracts, which are suitable for recurrent demands with uncertain quantities or delivery times, include definite-quantity, requirements, and indefinite-delivery/indefinite-quantity (ID/IQ) agreements (FAR 16.5). Definite-quantity contracts specify a guaranteed amount; requirements contracts explain estimated quantities without guarantees; and ID/IQ contracts allow for flexibility for recurrent needs by specifying minimum guarantees and possibly maximum limitations. These contracts are especially useful when the government is unable to forecast the exact amount of supply or services required. Please note that ID/IQ awardees in a multiple award contract are only eligible to bid on task orders and are not guaranteed any business. See Far 16.505. 

When the government is unable to correctly anticipate the length or scope of the work necessary, time-and-materials and labor-hour contracts are used. See FAR 16.6. Time-and-materials contracts pay for hours worked and materials used, with a price ceiling to keep expenses under control. Labor-hour contracts are similar in that they incorporate all anticipated costs in the hourly fee.

Letter contracts (FAR 16.603) are informal agreements used when quick performance is required and formal negotiations are not possible. These contracts are issued on a fixed-price or cost-reimbursement basis, subject to tight completion conditions.

Basic ordering agreements (BOAs) and basic agreements facilitate future orders or contracts but are not legally binding contracts. BOAs include agreed-upon terms for future orders, whereas basic agreements specify stipulations for future contracts. See FAR 16.702 and FAR 16.703.

Contract line item numbers (CLINs) are used in hybrid contracts to designate alternative procurement methods for separate contract components. These hybrid contracts enable the government to meet several demands within a single procurement framework, providing flexibility and efficiency.

Knowledge of contracting types is essential for federal government contractors because it helps them understand the risks, obligations, and potential rewards associated with various contract forms, allowing them to select the best type for their skills and project goals. This understanding promotes effective negotiating, compliance, and performance management, resulting in successful contract execution and profitability. Fed Contract Pros can help federal contractors comprehend appropriate contract types, navigate regulatory requirements, and optimize contract performance through personalized consulting and training services.

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In addition to this primer, there are 2 recommended DAU references which federal government contractors may consider helpful:

Comparison of Major Contract Types Chart (Excel)   
This version of the Chart allows for scrolling through the Chart vertically and horizontally with the column and row headers always remaining visible.

Supplement (PDF)   
The Supplement contains additional information on contract types, pricing arrangements, and incentives that were included in sixteen charts on the reverse side of the original Chart .