Companies that want to do business with the federal government will find that there are a few common types of federal contracts as well as a variety of rarer, but no less important, contract types. Each one is designed to offer the required level of flexibility and account for other factors including the delivery timeline, the level of risk and the nature of the goods or services being procured.

Before entering into a business agreement, it's important for civilian contractors to become familiar with basic structures and advantages of the types of federal contracts they might encounter.

"The appearance of U.S. Department of Defense (DoD) visual information does not imply or constitute DoD endorsement.""The appearance of U.S. Department of Defense (DoD) visual information does not imply or constitute DoD endorsement."

Fixed-price contracts

Fixed-price contracts are among the most common types of federal contracts. Within this category, contracts can come with a few different features.

The most basic is the firm-fixed-price (FFP) contract, wherein the price set for the supplies or services is set and paid out as a fixed, flat rate. This is useful for contractors providing specific products or services for which they can confidently determine the costs beforehand.

Similar to the FFP are fixed-price contracts with prospective price redetermination. After sticking to a firm fixed price for an introductory period, both parties will review the price and revise it as needed to account for market fluctuations and other contingencies.

Another contract type in this category is the fixed-price economic price adjustment contract. Under this arrangement, contractors may secure additional payment if market rates for the labor or materials required to complete the contract deliverables suddenly increase. This offers an advantage for companies that rely upon unstable markets for material and human resources.

Fixed-ceiling-price contracts with retroactive price redetermination are another variation. These are typically used for research and development projects. The civilian contractor and federal agency will agree upon a price cap prior to beginning the work and will adjust the compensation level — keeping it at or below that price ceiling — after the services have been rendered. 

Cost-reimbursement contracts

A more common category for R & D service providers is the cost-reimbursement contract. This places less risk on the company, which may incur variable costs while providing the federal agency's required services. Under cost-reimbursement contract arrangements, the government will pay for incurred costs up to a certain amount. These are only available in situations where the contractor can't accurately project the associated costs for their services.

Variations include a range of cost-plus-fee contracts, where the contractor receives either an award, incentive or fixed fee in addition to the reimbursement.

Alternatively, cost contracts are designed primarily for nonprofit organizations that render R & D services without collecting a fee but still require their costs covered.

Other types of federal contracts

Beyond those two most common types of federal contracts, a handful of other options exist.

First, incentive contracts can be structured similarly to fixed-price or cost-reimbursement contracts but feature an incentive tied to the contractor's performance, such as the ability to provide expedited service or come in under budget.

Next, the government may issue indefinite-delivery or indefinite-quantity contracts to companies whose services are hard to quantify ahead of time. This can be useful when services are contingent upon unpredictable factors or desired quantities are not yet known by the agency.

Finally, time-and-materials contract and labor-hour contract arrangements meant that the provider will be compensated for actual wage-based labor and materials costs at a fixed rate. These are used only when the duration of the contract is unknown and are typically issued for short-term projects.

This range of federal contracts gives civilian providers and federal agencies flexibility when coming to an agreement and delivering or procuring goods and services.