Contract Types: An Overview of the Legal Requirements and Issues

Federal procurement contracts are commonly divided into two main types-fixed-price and cost-reimbursement-that primarily differ as to whether the government or the contractor assumes the risk of increases in performance costs e.g., wages, materials. With a fixed-price contract, the contractor assumes this risk because it agrees to provide goods or services to the government for a certain price established at the time of contracting. If the performance costs exceed this price, the contractor generally cannot, absent a price adjustment clause, recover more money from the government. Rather, it must perform the contract at a loss, or default on the contract. In contrast, with a cost-reimbursement contract, the government assumes the risk of increases in performance costs because it agrees to repay the contractor for the allowable costs of performing certain work up to a total cost specified in the contract. Additionally, under certain types of cost-reimbursement contracts, the contractor may be entitled to profit in the form of fixed fees or incentive or award fees. Contracts can also be divided into other types, including incentive contracts, letter contracts, indefinite-deliveryindefinite-quantity IDIQ contracts, and time-and-materials TM contracts. Particular contracts can display features of various types e.g., pricing on both fixed-price and cost-reimbursement bases for different line items and can often be of multiple types e.g., an IDIQ TM letter contract. Determining the type of a particular contract is a question of law, and contract language stating that a contract is of a certain type is not dispositive.