The federal contracting market is full of opportunity. Federal government contracts are commonly divided into two main types, firm fixed price and cost reimbursement. Other contract types include incentive contracts, time and materials, labor-hour contracts, indefinite delivery contracts, and letter contracts.
The structure of how and when contractors are compensated is determined by the type of contract in place, which typically depends on the nature of the work and how the requirements are defined. It is helpful for government contractors to understand the various types of government contracts and their differences to ensure that DCAA compliance is met and to avoid sending proposals without properly budgeting or submitting for jobs that are not ideal for the contractor’s business.
What Are Government Contracts?
Government contracts are contracts issued by government agencies such as the Department of Defense (DOD) or General Services Administration (GSA). A request for proposal (RFP) is submitted when the government has contracting needs, such as electrical work during the construction of a new government building. The government works directly with prime contractors, who may hire subcontractors to assist them with the successful completion of the contract.
Prime government contracts are between a government agency and a contractor. In these cases, the contractor is entirely responsible for the successful completion of the project needs, although they may hire subcontractors to assist with the project. The prime contractor is the one who undersigns the submitted proposal in response to an RFP.
A subcontract is between the prime contractor and another contractor. A prime contractor may choose to hire subcontractors to perform duties that are outside of the prime contractor’s specialty or if there is more work than the prime contractor can perform within the specified amount of time to complete the project.
The Most Common Types Of Government Contracts
The contract type refers to the specific structure of the contract, including the way the payment is structured and how the work is completed. The most common types of government contracts are firm fixed price (FFP) contracts, cost reimbursement contracts, time and materials contracts, and indefinite delivery, indefinite quantity (IDIQ) contracts.
Firm Fixed Price Contracts (FFP) Contracts
Firm fixed price contracts are the simplest form of government contract. They provide a specified payment amount to the contractor in exchange for the products or services they provide; the contract amount is not adjusted based upon the contractor’s incurred costs. Due to the simple nature of firm fixed price contracts, government agencies typically prefer to establish reasonable prices before work begins. However, this is not always a possibility, in which case alternative contract types may be a better solution.
Cost Reimbursement Contracts
Cost reimbursement contracts provide payments for the contractor’s incurred costs that are necessary to complete the contract according to the requirements. The contract may stipulate a ceiling that is not to be exceeded and provide an estimated cost for the project in an effort to mitigate the government agency’s risk. Cost reimbursement contracts are usually used when the requirements and terms of the work cannot be precisely established beforehand.
There are variations of cost reimbursement contracts. The two most notable variations are cost contracts and cost plus fixed fee contracts. Cost contracts reimburse allowable costs as the contract requirements are completed. A cost plus fixed fee contract provides a fixed fee to the contractor that serves as the profit, and the costs are reimbursed to the contractor at no additional profit. This minimizes the risk for contractors who may otherwise feel as if the project presents too much of a financial risk.
Time and Materials Contracts
Time and materials contracts involve specified fixed hourly rates and a quote for the actual cost of the materials needed to complete the contract. The actual cost for materials includes but may not be limited to direct materials, subcontracts, and travel costs. These contract types are used when establishing the extent and duration of the contract are not possible.
There is a variation of the time and materials contract type called a labor hour contract. This refers to a contract only based on hourly work and may be appropriate if the materials are not provided by the contractor.
Indefinite Delivery, Indefinite Quantity (IDIQ) Contracts
Indefinite delivery, indefinite quantity contracts, also called IDIQ contracts, are used when the specific quantity of supplies or services cannot be established, such as if there is an anticipated ongoing need of the contractor’s services or goods. This allows government agencies to more effortlessly purchase from the contractor as new needs arise. There are three types of IDIQ contracts, which are definite quantity, indefinite quantity, and requirements contracts. Each task or order can either be a cost reimbursement or fixed price contract.
Learn More About Government Contracts From a CPA Professional
The CPA professionals at Diener & Associates deeply understand the various types of government contracts as well as the intricacies of the procurement process. If you have questions or are in need of our outsourced accounting services, call them at (703) 386-7825 or send us a message today.