Government Contracts – Types of Contracts
The federal government utilizes a number of different types of contracts. These types fall into two main categories, fixed-price contracts and cost-reimbursement contracts. These categories are pretty much self explanatory. The various types of contracts represent a spectrum of the possible allocations of risk between the government and the contractor. In a fixed-price contract, the contractor assumes most of the risks of performance. In a cost-reimbursement contract, the government assumes most of the risks. Of these two types, the most common examples are firm fixed-price contracts and cost-plus- fixed-fee contracts. Each general type of contract can also be modified to provide incentives for the contractor to reduce cost or achieve other objectives set by the government customer. Common examples are fixed-price incentive contracts in which the contractor’s profit is adjusted within a band depending on the cost of performance. There are also cost-plus-incentive fee contracts and cost-plus- award-fee contracts. In the latter example, the fee is subjectively determined by the government against a set of criteria which are not limited to cost incurred, but are usually related to aspects of contract performance desired by the government.
Contracts are also divided to some extent by the way they are awarded. Contracts awarded by the sealed bid public opening process must be either firm fixed-price or fixed-price with economic price adjustment. On the other hand, contracts awarded by negotiation can be either fixed-price of cost- reimbursement.
The one type of contract that may never be used is a cost-plus-percentage-of-cost contract. This type of contracting is prohibited by statute. Obviously, in this type of contract, the contractor has a tremendous incentive to increase the cost of performance to the detriment of the government customer.