Firm Fixed Price vs Time and Materials vs Cost-Plus: A Federal Contract Type Guide

The contract type decides almost everything about a federal opportunity — how you price it, how you get paid, what financial systems you need in place, and how much risk lands on you versus the government.

Most small contractors do not pick their contract type. The solicitation tells them what it is, and they bid anyway, often without realizing that a Firm Fixed Price IT services contract and a Cost-Plus-Fixed-Fee IT services contract are essentially two different businesses.

This guide walks through the three major contract type families under FAR Part 16 — Firm Fixed Price, Time and Materials, and Cost-Plus — and gives you a practical lens for deciding what to pursue, what to avoid, and what to fix on your side before you bid.

Why contract type matters more than most contractors realize

Firm Fixed Price (FFP) — FAR 16.202

Time and Materials (T&M) and Labor Hour — FAR 16.601 and 16.602

Cost-Plus contracts (CPFF, CPIF, CPAF) — FAR 16.3

Hybrid and special types you will see in RFPs

Which contract type should you target as a small contractor

How contract type changes your pricing strategy

Red flags: when to walk away from an opportunity based on contract type

Frequently asked questions

Can I propose a different contract type than what the RFP specifies?

Usually no. If the solicitation specifies FFP, the government expects an FFP proposal and proposals offering a different type are typically considered non-responsive. The narrow exception is when the RFP explicitly invites alternative proposals or when you are responding to a sources sought notice or Request for Information, where you can suggest contract types you believe are more appropriate. If you genuinely believe the contract type is wrong for the scope, the right channel is pre-solicitation questions submitted to the contracting officer.

Which contract type has the highest profit margin?

Firm Fixed Price has the highest theoretical ceiling on margin because you keep all efficiency gains. It also has the highest variance — FFP contracts that go badly produce significant losses. T&M produces predictable margin built into the rate, typically 8 to 15 percent net for small contractors. Cost-Plus margins are capped by statute (commonly 10 percent on R&D, 15 percent on architect-engineer, 6 percent on construction) and rarely exceed those caps in practice.

Do I need a DCAA-approved accounting system to win cost-plus contracts?

Effectively yes. The government will perform a pre-award accounting system survey (Standard Form 1408) before awarding most cost-reimbursement contracts, and not having an adequate system is a common reason small contractors lose otherwise winnable cost-plus awards. Setting up a DCAA-compliant system typically takes six to twelve months and requires accounting software (Deltek, Unanet, JAMIS, and similar) plus consulting support. Do not invest in this speculatively — do it when you have a specific target contract.

What is the difference between T&M and Labor Hour contracts?

A Labor Hour contract (FAR 16.602) is structurally identical to a T&M contract (FAR 16.601) except there is no materials reimbursement component. Labor Hour is used when the work is purely labor — consulting, professional services, IT support — with no materials involved. The accounting requirements, rate structure, and ceiling mechanics are otherwise the same.

Which contract type is best for IT or services companies?

A typical mature IT services contractor runs a mix: FFP for defined projects (implementations, builds, assessments), T&M or Labor Hour for ongoing staff augmentation and managed services, and occasionally cost-plus for large systems development work where the government wants direct cost visibility. Early-stage IT contractors should focus on FFP and T&M first, then expand into other types as their accounting systems and past performance mature.

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