Whether you’re just getting started in the federal contracting marketplace or have more experience, knowing the different categories and types of government contracts can fall under is crucial. Not only does it change how bidding (or not bidding) can be approached, but it also changes the way that the work is done (if you win the contract). While there are many different categories of contracts, the vast majority can be tied to a few common types.
What are the four types of government contracts?
We’ve covered the basics of getting registered for government contracting, as well as finding and bidding on your first contract. Now, we’re going to discuss the nuances and factors that define the most prominent types of contracts that you’ll see as a government contractor or subcontractor. The differences between them aren’t inconsequential either, and you should have a full understanding of not only how each works and varies, but also which types fit your business’s strengths or industry. The four most common types of government contracts that we’ll be going through today are:
- Fixed-price contract
- Cost-reimbursement contracts
- Time-and-materials contracts
- Indefinite delivery, indefinite quantity (IDIQ) contracts
1. Fixed-price contracts
The first and most basic type of government contract is fixed-price, also known as lump sum contracts. As the name suggests, these use a set price that doesn’t change based on the incurred costs by the contractor. The price is instead estimated at the beginning of the process, and if costs end up going above the estimation, the contractor is responsible. This is why these contracts are preferred by agencies, as it greatly reduces their risk that they take on. However, there is also a great profit opportunity for sellers, especially if the planning and forecasting of the expenditure phase are done accurately.
These types of contracts are typically used when the requested supplies and services have reasonably definite specifications (such as construction contracts) to make estimating and establishing a price easier. However there are a few subtypes of fixed-price government contracts, each with its own characteristics and considerations:
Types of fixed-price government contracts
- Firm fixed–price contracts (FFP) are ones in which the price is set and does not change, regardless of the actual costs incurred by the contractor or subcontractor.
- Fixed-price with incentive fee contracts (FPIF) is an agreement where both the buyer and the seller share the risks and rewards associated with cost overruns, as well as underruns.
- Fixed-price with economic price adjustment contracts (FPEPA) is most helpful when the cost of providing goods or services is subject to fluctuations due to certain economic factors such as inflation or labor costs.
- Fixed-price level of effort contracts (FPLOE) are most often used when the level of effort required to complete the project is uncertain, but can be reasonably estimated.
2. Cost-reimbursement/cost-plus contracts
When situations call for more flexibility around final expenses, cost-reimbursement (or cost-plus) contracts are used. Generally, an estimated quote is provided by the seller at the beginning of the process, with the finalized price being determined either at the completion of the project or at a designated date along the project timeline. The flexibility of these contracts is not unlimited, however, and additional incurred costs are only allowed within the agreed-upon allowance in the contract.
The most common variations of cost-plus government contracts include:
- Cost-plus-fixed-fee (CPFF) contracts are when the contractor is reimbursed for all allowable costs during the project, plus receives a fixed fee for profit.
- Cost-plus-incentive-fee (CPIF) contracts allow for reimbursement, plus an incentive fee that encourages contractors to control costs and meet project performance goals.
- Cost-plus-award-fee (CPAF) contracts compensate for reimbursements as well, but fees are awarded subjectively by the government based on performance.
These types of contracts are often used when accurate estimation for fixed-price contracts is unrealistic or uncertain. Examples of government contracts that agencies that use cost-reimbursement contracts include the National Weather Services and the Federal Transit Administration.
3. Time-and-material contracts (T&M)
Presenting the least risk to contractors and the most risk to the government (and therefore why they’re much less common), time-and-materials contracts can be thought of as payment by the hour and material costs. Only used when the estimation of project scope and costs are even more difficult or unclear than cost-reimbursement, T&M contracts use an agreed-upon cost for materials and hourly rate for labor to determine a final price. While this contract type has many benefits for contractors, it also means that tedious logging of everything that happens on this project is a necessity, from time spent to detailed lists of materials used.
As we mentioned, T&M contracts are avoided if possible by the government because of the increased risk it puts on them. However, in situations where the duration or scope of work is unknown or difficult to reasonably estimate, they may be used.
4. Indefinite delivery, indefinite quantity (IDIQ) contracts
The last of the major contract types is relatively common in the federal marketplace and can use either fixed-price or cost-reimbursement models. The indefinite part of the name refers to the fact that these contracts often have recurring “task orders” under the umbrella or main contract. This allows the government to not only specify if each task will be fixed-price or cost-reimbursement, but also select a pool of awardees that compete on a recurring basis for each task, rather than one awardee for the entire contract. This provides the government with the most flexibility and value, as one bidder might offer a lower price for services as time goes on, and the quantities are more adaptable.
These contracts have gained popularity in recent years and are used when the government can’t predetermine the required quantity of supplies or services above a specified minimum. In addition, it’s usually a situation where it’s inadvisable for the government to commit to more than that minimum quantity and instead choose a recurring order of the supplies or services.
Additional types of government contracts for small businesses
Along with the four common types of federal contracts above, the government offers few more contract types, specifically tailored just for certified small businesses. These contract types encourage small business ideas to participate in government contracting, while providing them with opportunities to compete with larger contracting firms. Some of these contracts and certifications include:
- Women-owned small business (WOSB) contracts are set aside specifically for businesses certified as at least 51% owned and run by women.
- 8(a) business development contracts awarded in these programs are designed to help small, disadvantaged businesses compete in the federal marketplace.
- Veteran-owned small business (VOSB) and service-disabled veteran-owned small business (SDVOSB) contracts are provided to businesses that are at least 51% owned and operated by veterans and service-disabled veterans.
- Historically underutilized business zone (HUBZone) contracts are reserved for small businesses located in economically disadvantaged communities where the government aims to encourage economic development.
Grow your business and win federal contracts today!
Whichever type of government contract you’re looking for or pursuing, FAMR’s experts can help maximize your chances of being awarded funding. We offer a variety of services to certify and market your company, from Capability Statement writing to optimizing and streamlining your DSBS profile. On top of that, our portal can alert you to key opportunities, reminders, and much more.
Contact us today and boost your federal marketplace success rate!
