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Federal contracts bind business owners and the government. They set prices and quality standards for the production of goods and services. While several contract types exist, the two primary government contract types are fixed price contracts and cost reimbursement contracts. Get to know the limitations and requirements for each.

When the government has unique needs, there needs to be a unique approach to getting the work done. Federal contracts establish accountability and outline specific requirements contractors and government agencies must meet in order to procure goods and services. The type of contract used varies between agency and by need. While fixed price and cost reimbursement contracts are two widely-used contract types, there others used for specific purposes.

Fixed Price Contract

fixed price contract

Fixed price contracts have a firm (sometimes adjustable) target or ceiling price. The contractor agrees to supply the product or service without going over the maximum agreed to in the contract. These types of contracts put greater risk on contractors, forcing them to control costs and maximize performance. Fixed price contracts are used when acquiring commercial items.

All federal agencies use fixed price contracts, and they were officially endorsed by President Obama in 2009: “There shall be a preference for fixed-price type contracts. Cost reimbursement contracts shall be used only when circumstances do not allow the agency to define its requirements sufficiently to allow for a fixed-price type of contract.”

Cost Reimbursement Contract

While cost reimbursement contracts don’t have the endorsement of the President, there is still a place for them in the procurement process. Cost reimbursement contracts are used when the projected cost of a contract cannot be estimated accurately. Because of the limited certainty towards final costs, the government faces greater risk with cost reimbursement contracts. These contracts generally require more oversight to monitor that appropriate incurred costs are paid. Quality is generally of higher concern because contractors should not cut corners in order to cover risk.

Other Contract Types

Indefinite Delivery

Indefinite delivery contracts can be either definite or indefinite. They are used when the quantities of supplies or services needed for a fixed period of time are not known at the time of contract award. This contract type offers flexibility because the government does not need to commit itself to more than a minimum quantity.

Time and Materials Contract

Time and materials contracts are used when the government needs products or services, but is not able to accurately estimate the duration or scope of work, or reasonably anticipate costs. They establish a ceiling price, which, if exceeded, contractors must assume the risk and cost for going above the threshold. Time and materials contracts are awarded competitively by contract negotiation.

The government buys the needed supplies or services on the basis of direct labor hours at specified fixed hourly rates that include wages, overhead, profit and general and administrative expenses. This type of contract requires strict oversight into contractor management.

Labor Hour Contract

A Labor hour contract is similar to a time and materials contract, except that materials are not supplied by the contractor and used only for the procurement of services