How Many Types of Contracts Are There, Anyway?

When I first set out in federal contracting over 15 years ago, I remember feeling underwater, swimming in a vast ocean of foreign terminology.   Abbreviations like “IDIQ” and phrases like “Firm Fixed Price” were constantly volleyed around my office. I was just supposed to know what they meant!

As I quickly learned, the type of contract used by the Government in executing a program impacts many aspects of the work itself.  Most importantly, there must be a balance between incentivizing the contractor to work efficiently and cost-effectively, while hitting all the vital benchmarks for the federal government customer.   

For the uninitiated, every Federal Government opportunity will fall into a pre-selected type. The Federal Acquisition Regulation (FAR) defines a dozen different contract types. The contract type dictates how the work is performed, how payment to the Prime contractor is delivered, and how the Government anticipates receiving the goods or services they are seeking through the program. Almost always, contracting boils down to a question of risk.  What is the Government willing to take on regarding performance risk? Is the schedule proposed attainable? Is the goal achievable?  

Here are five of the most conventional contracting types and how they impact both the Government and contractors:

Firm Fixed Price (FFP):   This contract sets a cost for the work performed prior to the work beginning.  This places the largest risk on the contractor performing the work, as there will be no reimbursement for costs incurred exceeding that budgetary threshold.   This type of contract is often used in the commercial space where costs can be fairly estimated and assumption of risk reasonably forecasted.  Best used when: Requirements are clearly defined. 

Firm Fixed Price (FFP) Level-of-Effort (LOE) : If the work prescribed is quite vague, and the Government isn’t assured the task is achievable, this approach may be best applied.  It allows the set cost parameters of FFP while the Government must assume the risk associated with the administrative burden of tracking the contractor’s best level of effort to achieve the desired results within the specified LOE.  Best used when: Requirements can be somewhat defined and the Government is willing to assume some administrative obligation. 

Cost Reimbursement:  Within this framework, the incurred costs are reimbursed as described in the contract language.   The contractor may not exceed the pre-established ceiling without the approval of the contracting officer. This type of contract places emphasis on expediency in starting the work, thus placing markedly more risk on the government’s side.  Best used when: Requirements are unclear, and success isn’t guaranteed.  

Time and Materials: If the Government’s goals and required approach is vague and the timeline or goals are equally undefined, this is the optimal approach.  It allows for flexibility in defining labor types but does require a more precise knowledge of the cost for any billable labor.  The Government will pay for hours worked and any Other Direct Costs (ODCs) incurred all at cost pursuant to accepting a Statement of Work (SOW) that gives some outline to the anticipated work. Best used when:  No other contract type is suitable, and it is possible to estimate labor rates (as well as overhead/profit), but not hours or material required to satisfy the goal.

Indefinite-Delivery Indefinite-Quantity:  When the Government isn’t sure about the specific number of ‘widgets’ they need for a project, but can create a basic contract upon which an indefinite number of delivery orders or task orders are placed.  This allows the Government to attempt broad specialization with selection of a strong Prime, while simultaneously granting the government inherent risk in that gameplan. Best used when: the project is a service contract and works as a base year plus option-year structure. 

The vital takeaway from any Government contracting discussion is to remember the assessment of risk.  Who is taking on the most risk? What is the goal, and is it reasonably achievable? Ultimately those are the answers that will take you the furthest in your understanding and help you and your firm determine if the opportunity is worth pursuing.  

Kazia Levin is an Assistant Director of Contracts at BZ.  She is a federal contracting professional with extensive experience guiding program management, policy implementation and financial goal-setting.