Federal Contract Type Decoder
Type CPFF, FFP, T&M, IDIQ, or BPA and get the plain-English version: how it works, who eats the cost risk, why the government chose it, what your accounting has to be able to do, and how hard it is for a newer contractor.
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16 of 16 contract types
FFP - Firm-Fixed-Price
Fixed-price
How it works
You agree to one price for a defined deliverable or period of performance. That price does not change because your costs went up. You get paid on delivery or on a payment schedule tied to milestones or monthly performance.
Who carries the cost risk
The contractor carries essentially all cost risk. If you underestimate labor hours, materials, or travel, you absorb the loss. If you perform efficiently, you keep the upside.
When the government uses it
When the requirement is well defined and the government can describe exactly what it wants: commercial products, custodial and grounds services, construction with a clear scope, training, equipment, and most simplified acquisition buys.
Accounting capability expected
Minimal. You need normal commercial books, a way to invoice accurately, and enough cost knowledge to price the work. No approved government accounting system required.
Why it is low difficulty for beginners
This is where nearly every new contractor should start. The compliance burden is light and the invoicing is simple.
Watch out for
Pricing too low to win. On FFP there is no rescue: a bad estimate becomes a loss you perform anyway. Build in a realistic contingency and read the scope for hidden requirements.
FP-EPA - Fixed-Price with Economic Price Adjustment
Fixed-price
How it works
A fixed price that can move up or down under a stated formula tied to a published index or established prices, usually for labor or commodity cost swings.
Who carries the cost risk
Shared, but narrowly. The contractor still carries performance risk; only the specified cost element can be adjusted.
When the government uses it
On multi-year fixed-price work where there is serious doubt about the stability of a market: fuel, metals, food, or wage-driven services.
Accounting capability expected
You must be able to document the index or actual cost that triggers the adjustment and submit the adjustment request correctly and on time.
Why it is moderate difficulty for beginners
Straightforward to perform, but the adjustment clause has to be read carefully or you never claim what you are owed.
Watch out for
Assuming any inflation is recoverable. Only the element named in the clause, under the named index, adjusts.
FPIF - Fixed-Price Incentive (Firm Target)
Incentive
How it works
A target cost, target profit, ceiling price, and a share ratio are negotiated. Final profit is adjusted by a formula comparing final cost to target cost, and the government never pays above the ceiling.
Who carries the cost risk
Shared up to the ceiling, then the contractor alone above it.
When the government uses it
On development or production work where cost is uncertain enough that pure FFP would be risky, but the government still wants a hard ceiling and a reason for you to control cost.
Accounting capability expected
Real cost accounting. You must track actual costs credibly because the final price depends on them, and expect audit attention on the cost submission.
Why it is high difficulty for beginners
Requires cost accounting discipline plus the ability to negotiate and administer a share-ratio formula.
Watch out for
The ceiling. Costs above it are entirely yours, with reduced or no fee.
T&M - Time-and-Materials
Time and materials
How it works
You bill fixed hourly labor rates for hours actually worked, plus materials at cost, up to a ceiling amount. Profit is built into the loaded labor rates. The government does not owe you anything past the ceiling unless it raises it.
Who carries the cost risk
Primarily the government on cost, since more hours means more payment. The contractor carries the risk of exceeding the ceiling and of unbillable time.
When the government uses it
When the scope of effort cannot be estimated with confidence: emergency repairs, IT support, engineering studies, staff augmentation, and diagnostic work.
Accounting capability expected
Accurate timekeeping by employee, day, and contract line, plus a defensible basis for your labor categories and rates. Timekeeping fraud is the most common serious violation on T&M.
Why it is moderate difficulty for beginners
Easy to invoice conceptually, but you must run clean, contemporaneous timekeeping and monitor the ceiling constantly.
Watch out for
Working past the ceiling. The Limitation of Funds and ceiling notification requirements are real, and unauthorized work is often unpaid work.
LH - Labor-Hour
Time and materials
How it works
A T&M contract with no materials component. You bill only loaded hourly rates for hours worked, up to a ceiling.
Who carries the cost risk
Primarily the government, with the contractor responsible for staying inside the ceiling.
When the government uses it
Pure services and staffing support where the government supplies materials or none are needed.
Accounting capability expected
Same timekeeping rigor as T&M, without material cost tracking.
Why it is moderate difficulty for beginners
The least complex of the effort-based types, but timekeeping compliance still governs.
Watch out for
Uncompensated overtime and hours worked outside approved labor categories.
CPFF - Cost-Plus-Fixed-Fee
Cost-reimbursement
How it works
The government reimburses your allowable, allocable, and reasonable costs and pays a fixed fee negotiated up front. The fee dollars do not change when actual costs change, so your profit does not grow by spending more. You bill costs as incurred plus a proportional share of the fee, holding back a fee reserve until the work is complete.
Who carries the cost risk
The government carries the cost risk. It pays what the work actually costs, within the funded amount. Your risk is that unallowable or unsupported costs get disallowed, sometimes years later after audit.
When the government uses it
Research and development, studies, first-of-a-kind engineering, and any effort where the scope genuinely cannot be priced firmly. Cost-reimbursement contracts require a determination that the contractor's accounting system is adequate and that appropriate surveillance exists.
Accounting capability expected
This is the big one. Expect a job-cost accounting system that segregates direct and indirect costs, tracks cost by contract and CLIN, applies government-accepted indirect rates (fringe, overhead, G&A), identifies unallowable costs per FAR Part 31, produces reliable incurred-cost invoices, and supports an annual incurred cost submission. DCAA may perform an accounting system review or pre-award survey, and timekeeping and labor distribution get direct scrutiny.
Why it is high difficulty for beginners
The performance may be easy while the compliance is not. Most new contractors do not yet have an adequate accounting system, provisional billing rates, or the administrative capacity for incurred cost submissions.
Watch out for
Assuming reimbursement is guaranteed. Costs must be allowable, allocable, and reasonable, and the Limitation of Cost or Limitation of Funds clause means you must notify the government before you spend past the funded amount. Work beyond it is at your own risk.
CPIF - Cost-Plus-Incentive-Fee
Cost-reimbursement
How it works
Costs are reimbursed and the fee moves up or down under a formula comparing actual cost to a target cost, between a minimum and maximum fee.
Who carries the cost risk
The government carries cost risk; the contractor's fee is the variable at stake.
When the government uses it
Development work where cost control is important enough to incentivize but the scope still cannot be fixed-priced.
Accounting capability expected
Everything CPFF requires, plus the ability to forecast and report cost performance credibly because your fee depends on it.
Why it is very high difficulty for beginners
Full cost-accounting compliance layered on top of incentive administration and reporting.
Watch out for
Optimistic target costs that guarantee fee erosion.
CPAF - Cost-Plus-Award-Fee
Cost-reimbursement
How it works
Costs are reimbursed, a base fee (sometimes zero) is paid, and an award fee is earned based on the government's subjective evaluation of your performance against an award fee plan.
Who carries the cost risk
The government on cost; the contractor on earning the award fee.
When the government uses it
Long-term services and mission support where quality, responsiveness, and management judgment matter more than a cost formula.
Accounting capability expected
Full cost accounting plus disciplined performance reporting and self-assessment against the award fee criteria.
Why it is very high difficulty for beginners
Requires mature accounting, monthly performance narrative reporting, and a customer relationship management habit.
Watch out for
Award fee determinations are largely unilateral and generally not something you can protest as a business judgment.
CS / CR - Cost-Sharing and Cost Contract (no fee)
Cost-reimbursement
How it works
A cost contract reimburses allowable costs with no fee. A cost-sharing contract reimburses only an agreed portion of costs, with the contractor absorbing the rest in exchange for something of value such as data rights or commercial benefit.
Who carries the cost risk
Shared, and on cost-sharing the contractor deliberately funds part of the work.
When the government uses it
Research with nonprofits, universities, and R&D efforts where the contractor gains independent benefit.
Accounting capability expected
Same cost-accounting rigor as CPFF, including indirect rate support.
Why it is high difficulty for beginners
Full compliance burden with no fee or partial cost recovery.
Watch out for
Committing cost share you cannot fund through completion.
IDIQ - Indefinite-Delivery, Indefinite-Quantity
Ordering vehicle
How it works
Not a pricing arrangement: it is a container. The government awards a base contract with a guaranteed minimum, a ceiling, and an ordering period, then issues task or delivery orders during that period. Each order carries its own pricing type, so one IDIQ can hold FFP, T&M, and cost-reimbursement orders.
Who carries the cost risk
Depends entirely on the pricing type of each individual order.
When the government uses it
When the agency knows it will need a category of work repeatedly but not exactly when or how much: construction, IT services, medical staffing, environmental work.
Accounting capability expected
Whatever the order types require, plus the capacity to respond to short-fuse order competitions while performing existing orders.
Why it is moderate difficulty for beginners
Winning the base IDIQ takes a real proposal effort, and the guaranteed minimum is often small, so revenue only comes from winning orders afterward.
Watch out for
Assuming an IDIQ award equals revenue. If you never win a task order, you may earn only the guaranteed minimum.
Task / Delivery Order - Task Order and Delivery Order
Ordering vehicle
How it works
The actual work order placed under an IDIQ, GWAC, or Schedule. A task order buys services; a delivery order buys supplies. Each has its own scope, price, period, and funding, and on multiple-award vehicles holders normally get a fair opportunity to compete.
Who carries the cost risk
Set by the order's own pricing type.
When the government uses it
Constantly. Most federal services dollars flow through orders rather than standalone contracts.
Accounting capability expected
Driven by the order type, but you also need the ability to track cost and performance per order rather than only per contract.
Why it is moderate difficulty for beginners
Response times are short, often days, and only vehicle holders may compete.
Watch out for
Protest rights on task orders are limited compared to base contract awards.
BPA - Blanket Purchase Agreement
Ordering vehicle
How it works
A pre-arranged agreement for recurring needs that sets terms, and often pricing, in advance. The government then places BPA calls against it. A BPA is not itself a contract obligation to buy; the calls create the obligation.
Who carries the cost risk
Set by the pricing of each call, most often fixed-price.
When the government uses it
Repeat commodity and recurring service buys where speed matters: supplies, maintenance, staffing, print, and sanitation.
Accounting capability expected
Usually light. Accurate invoicing per call and the ability to honor agreed pricing for the BPA term.
Why it is low difficulty for beginners
Once you hold the BPA, ordering is fast and administratively simple, which makes it a strong early revenue channel.
Watch out for
No guaranteed volume. Multiple-award BPAs mean you still compete for calls.
Requirements - Requirements Contract
Ordering vehicle
How it works
The government commits to buy all of its actual requirements for the specified supplies or services from you during the contract period, with an estimated quantity provided.
Who carries the cost risk
Shared. You get exclusivity but must have capacity for a volume the government only estimates.
When the government uses it
When one activity's total need for an item or service can be filled by a single source.
Accounting capability expected
Driven by the pricing arrangement, usually fixed unit prices.
Why it is moderate difficulty for beginners
Simple to invoice, but demand forecasting and surge capacity are on you.
Watch out for
The estimate is not a guarantee. Actual orders can come in far below or above it.
Definite-Quantity - Definite-Quantity Contract
Ordering vehicle
How it works
A firm quantity is bought for delivery at designated times or locations during a fixed period.
Who carries the cost risk
Contractor on cost, if fixed-price, with quantity certainty in exchange.
When the government uses it
When the exact quantity is known but delivery timing is not.
Accounting capability expected
Standard commercial invoicing.
Why it is low difficulty for beginners
Predictable quantity plus simple pricing makes this beginner friendly.
Watch out for
Delivery schedule penalties and inspection or acceptance terms.
GWAC / Schedule order - GWAC and GSA Schedule Ordering
Ordering vehicle
How it works
Orders placed against a governmentwide vehicle or a GSA Schedule contract. Pricing is usually fixed-price or labor-hour against pre-negotiated ceiling rates, and only vehicle holders may quote.
Who carries the cost risk
Set by the order type, most commonly the contractor under fixed-price.
When the government uses it
To buy quickly with reduced procedural burden while still documenting competition.
Accounting capability expected
Ability to honor Schedule pricing terms, track Schedule sales, and pay the industrial funding fee where applicable.
Why it is moderate difficulty for beginners
Ordering is simple, but you must hold the vehicle and administer its reporting obligations.
Watch out for
Ordering outside your awarded scope or SINs. That is a compliance problem, not a growth opportunity.
Letter Contract / UCA - Letter Contract (Undefinitized Contract Action)
Other
How it works
A written preliminary instrument authorizing you to begin work immediately before terms are fully negotiated, with a not-to-exceed amount and a deadline to definitize.
Who carries the cost risk
Largely the contractor until definitization, since final price and fee are unsettled while you spend.
When the government uses it
Urgent needs, especially in defense, where waiting to negotiate would harm the mission.
Accounting capability expected
Strong cost accounting and documentation, because your incurred costs become the basis of the eventual negotiation.
Why it is very high difficulty for beginners
You perform while price risk is open and audit exposure is at its highest.
Watch out for
Weak cost documentation during the undefinitized period.
Side-by-side comparison
The fastest way to see the tradeoff: as cost risk shifts from you to the government, your accounting and compliance burden goes up.
| Type | How it is priced | Cost risk | Beginner difficulty | Best fit |
|---|---|---|---|---|
| FFPFirm-Fixed-Price | One agreed price | Contractor | Low | Clearly defined products and services |
| FPIFFixed-Price Incentive | Target cost, ceiling, share ratio | Shared, capped | High | Production with cost uncertainty |
| T&MTime-and-Materials | Hourly rates plus materials, to a ceiling | Mostly government | Moderate | Undefined level of effort |
| LHLabor-Hour | Hourly rates only, to a ceiling | Mostly government | Moderate | Staffing and support services |
| CPFFCost-Plus-Fixed-Fee | Allowable costs plus fixed fee | Government | High | R&D and studies |
| CPIFCost-Plus-Incentive-Fee | Costs plus formula fee | Government cost | Very high | Development with cost incentives |
| CPAFCost-Plus-Award-Fee | Costs plus base and award fee | Government cost | Very high | Long-term mission support |
| IDIQIndefinite-Delivery IDIQ | Container for orders | Depends on order | Moderate | Recurring work, unknown timing |
| BPABlanket Purchase Agreement | Pre-set terms, priced calls | Depends on call | Low | Fast repeat buys |
| Task OrderTask / Delivery Order | Priced per order | Depends on order | Moderate | Actual work under a vehicle |
Two things beginners mix up
First, IDIQ, BPA, and task orders are not pricing types. They describe how the government orders work, and each order still carries its own pricing arrangement, usually firm-fixed-price or labor-hour. Second, cost-reimbursement work is not free money. Before an agency can award you a cost-type contract, your accounting system has to be adequate to determine costs, so most newer companies should build a track record on fixed-price and T&M first.
Learn to price each type correctly
Module 18 of the free Beginner Series covers contract types in depth, and Module 13 walks through pricing with a worksheet you can reuse on every bid.