You need to know what you’re agreeing to when it comes to government contracts. It’s the only way you can predictably manage your revenue and long-term growth.

The types of government contracts you work under will determine:

How you get paid

  • Who assumes financial risk
  • What compliance rules apply
  • How much administrative work is required
  • How much profit you can realistically earn
  • Essentially, your contract structure impacts pricing, staffing, reporting, and margin, so it’s important to get it right.

In this guide, we’re breaking down the four types of government contracts in detail, giving you definitions, examples, and guidance on when to use each one.

Let’s get into it!

Types of government contracts

In federal procurement, there are four primary government contract types to be aware of. Each serves a different purpose depending on how the work is defined and how you need the risk to be allocated.

  1. Fixed-price contracts: There is a set price for the defined work.
  2. Cost-reimbursement contracts: The government pays allowable costs plus a fee.
  3. Time and materials (T&M) contracts: The payment is based on labor hours and material costs.
  4. Indefinite delivery contracts: There is a flexible ordering structure when it comes to recurring or undefined quantities.

Now let’s take a closer look at each.

Fixed-price government contracts

A fixed-price contract will establish a total price upfront. If the costs are more than your estimate, you’ll have to absorb the loss of money. If you manage these contracts efficiently, you’ll keep the additional profit.

These agreements will work best if you have a stable scope and if it’s clearly documented.

Common types of fixed-price contracts

1. Firm-fixed-price (FFP)

  • The total price does not change unless the scope changes
  • The cost risk lies mostly with the contractor
  • Most common government contract type

2. Fixed-price incentive (FPI)

  • Includes cost goals and performance incentives
  • The profit will change based on performance outcomes
  • Encourages cost control and efficiency

3. Fixed-price with economic price adjustment (FPEPA)

  • Allows for price adjustments to be tied to specific economic factors
  • Often used for long-term supply contracts
  • Reduces exposure to inflation or commodity swings

Pros and cons

Pros

  • Clear revenue expectations
  • Simpler invoicing
  • Higher profit potential with strong cost control

Cons

  • Significant cost risk
  • Requires accurate estimating
  • Limited flexibility once awarded

Example: Say a federal agency hires a contractor to put into place standardized cybersecurity controls for multiple offices. In this case, a firm-fixed-price contract would make the most sense, since the deliverables and timelines are well defined.

Cost-reimbursement government contracts

Cost-reimbursment contracts should be used if you can’t accurately estimate the scope of a project. In this case, the government would reimburse allowable, allocable, and reasonable costs, plus a fee.

These contracts will put more of the cost risk on the government, but at the same time, it increases oversight and audit requirements.

Common types of cost-reimbursement contracts

Cost-plus-fixed-fee (CPFF)

  • Reimbursement of costs
  • Fixed fee does not change with actual expenses

Cost-plus-incentive-fee (CPIF)

  • The fee will adjust based on cost performance targets
  • Any savings or overruns will be shared between parties

Cost-plus-award-fee (CPAF)

  • Includes additional compensation based on performance evaluations
  • Often used in complex or long-term programs

When to use cost-reimbursement contracts

  • Research and development projects
  • Complex engineering initiatives
  • Programs with high levels of uncertainty

Key considerations

  • Strict cost accounting standards apply
  • Detailed documentation is mandatory
  • Audits are common

In these types of contracts, you need to keep in mind cost tracking. When done poorly, it can lead to disallowed expenses, which can directly impact profitability.

Time and materials government contracts

Time and materials (T&M) contracts offer a combination of elements from fixed-price and cost-reimbursement contract types.

With T&M contracts, the government will pay:

  • Agreed hourly labor rates, which include profit
  • Actual material costs, usually with limited markup

In these contracts, hourly rates are negotiated ahead of time, unlike pure cost-reimbursment contracts.

How billing works

Contractors will invoice based on:

  • The number of hours worked
  • Established hourly rates
  • Actual materials used

When to use T&M contracts

  • IT support services
  • Consulting engagements
  • Short-term technical projects
  • Situations where scope is evolving

Pros and cons

Pros

  • Flexible for undefined work
  • There’s lower cost risk than a fixed-price model
  • Predictable margins per labor hour

Cons

  • Revenue is tied directly to labor hours
  • Strong government oversight
  • Have to track time worked, adding admin burden to contractor

Labor-hour contracts are a type of T&M contract that reimburses the labor only and does not include materials.

Indefinite delivery contracts

Indefinite delivery contracts give you flexibility if the government can’t determine the exact scope of times and quantities of future supplies or services at the time of the award.

So, instead of committing to a defined scope from the beginning, these contracts give you ordering parameters to work within.

Common types of indefinite delivery contracts

1. Indefinite delivery, indefinite quantity (IDIQ)

  • Establishes minimum and maximum quantities of the order
  • Agencies will issue task orders (services) or delivery orders (products) over time

2. Definite quantity contracts

  • Provide a fixed quantity that is delivered during a set period

3. Requirements contracts

  • The government agrees to purchase all requirements from one contractor during the contract term

How task and delivery orders work

  • A base contract will set the pricing and terms
  • Individual orders will define specific work required
  • Each order operates like a mini-contract

When to use indefinite delivery contracts

  • Ongoing maintenance
  • Multi-year service agreements
  • Recurring supply needs

In these contracts, the risk will depend on the pricing structure of each task order, whether it’s fixed-price, T&M, or cost-reimbursment.

Other common types of government contracts

Beyond the primary four government contract types, you may come across a few more:

  • Letter contracts: These authorize work to start before a final agreement is negotiated.
  • Blanket purchase agreements (BPAs): This is a simplified, pre-negotiated agreement used for recurring purchases.
  • Basic ordering agreements (BOAs): This is a written framework or understanding that is used for future orders.
  • Incentive contracts: These tie the profit to performance metrics.

Keep in mind that these kinds of contract structures are often layered within broader contract vehicles/types.

How to choose the right type of government contract

To choose which contract type is best for your needs, you need to be strategic in your evaluation.

Here’s what to consider:

Scope clarity

Do you have a good understanding of the project’s scope? A fixed-price model might be the way to go if this is the case. If scope is uncertain, consider cost-reimbursment or T&M.

Cost predictability

If you have reliable estimates, go with a fixed-price model. If there’s high variability in pricing, a cost-reimbursement structure might suit you better.

Risk tolerance

Consider whether you’re willing to assume the cost risk. If so, fixed-price models could work for you. If you’d prefer shared risk, consider the CPIF or T&M contract types.

Compliance and reporting capacity

Can you rely on your accounting systems for compliance? If so, it might be feasible to go with a cost-reimbursement model. If you have limited compliance and/or reporting infrastructure, however, a fixed-price model might be the safer option when it comes to cost-tracking and audits.

Profit margin objectives

Consider whether the structure of the contract will allow you to protect or increase margin. A higher profit margin might mean a fixed-price model is better, whereas a stable margin could mean a cost-reimbursment or T&M model is the way to go.

The important thing to remember is to balance opportunity with operational capability when choosing the type of contract structure to use.

Pros and cons comparison

Contract type Risk allocation Pricing flexibility Admin burden Profit potential
Fixed-price High contractor risk Low Low–moderate High if controlled
Cost- reimbursement Higher government risk Moderate High Moderate, stable
Time & materials Shared Moderate Moderate–high Labor- dependent
Indefinite delivery Varies by order High Moderate Variable

Common mistakes contractors make

Here are some common errors that even the most experienced teams make when deciding which government contract type to use:

  • Underestimating compliance requirements
  • Accepting too much cost risk under firm-fixed-price agreements
  • Mispricing fixed-priced work like labor or indirect costs
  • Poor tracking of reimbursable expenses
  • Not understanding how task orders affect revenue forecasting

These mistakes could lead to margin erosion, audit findings, or even operational strain.

How contract management software helps manage government contracts

When managing multiple government contract types, things can get complex pretty quickly. This is especially true with IDIQ contracts that have layered task orders.

Contract management software can help significantly by:

  • Centralizing compliance documentation
  • Tracking contract types and associated obligations
  • Managing task orders and modifications
  • Maintaining version control
  • Supporting audit readiness

PandaDoc allows you to standardize templates by contract type, automate approval workflows, and store all your agreements in one secure system. It gives you the visibility you need to improve decision-making and reduce risk.

Plus, if your government portfolio grows (as it likely will), organization is necessary to stay on top of your agreements.

Simplify government contract management with PandaDoc

Once you understand the different types of government contracts, you’ll better manage risk, protect margins, and maintain compliance.

Each contract structure addresses responsibility and reward in different ways, so take care when choosing which one to work with. And don’t forget to have a proper contract management system in place to simplify documentation, approvals, tracking and compliance.

Ready to take the leap with PandaDoc? Request your free demo today!

FAQ

GSA contracts are long-term government-wide agreements between the General Services Administration and private businesses. They allow agencies to purchase pre-negotiated products and services from approved vendors by using a specific procurement process.

Small business size standards are typically defined by the Small Business Administration (SBA). They can vary by industry and be dependent on annual revenue or your employee count.

An IDIQ, or indefinite delivery/indefinite quantity, contract sets parameters for ordering, including a minimum and maximum. These contracts allow agencies to issue a task or delivery order as needed without knowing the exact scope upfront.

A time and materials contract, or T&M contract, details how contractors are paid based on negotiated hourly labor rates and the actual material costs of the project.

Fixed-price contracts will pay a specific amount regardless of the actual costs of the project, which puts more cost risk on the contractor. On the other hand, cost-reimbursment contracts will repay allowable costs plus a fee, which puts more cost risk on the government. However, reporting and compliance requirements are increased in these types of agreements.