Every federal solicitation answers one question first: who carries the risk if the work costs more than expected? FAR Part 16 answers it through a menu of contract types running from firm-fixed-price, where the contractor absorbs every dollar of overrun, to cost-reimbursement, where the government does. Time-and-materials sits in an uneasy middle, and IDIQ vehicles solve a different problem — indefinite quantity, not price risk. Here is how each type works, when the government picks it, and what it means for a contractor deciding whether to bid.
Firm-Fixed-Price: Maximum Risk, Maximum Certainty
Under FAR Subpart 16.2, a firm-fixed-price (FFP) contract sets "a price that is not subject to any adjustment on the basis of the contractor's cost experience in performing the contract." The contractor is paid the agreed price regardless of actual cost to perform — deliver under budget and keep the difference as profit, run over and absorb the loss. FAR directs contracting officers toward FFP when specifications are reasonably definite and a fair price can be established up front, typically because adequate price competition exists, prior comparable purchases support the pricing, or performance risks are identifiable and estimable. Two relatives soften the pure FFP structure: fixed-price with economic price adjustment, which lets the stated price move up or down based on contingencies like labor or material cost indexes over a long period of performance, and fixed-price-incentive, which formulaically ties final price to the relationship between negotiated target cost and actual cost, splitting some risk between the parties.
Cost-Reimbursement: The Government Absorbs the Overrun
FAR Subpart 16.3 flips the risk allocation. Cost-reimbursement contracts pay the contractor its allowable, allocable costs plus a fee, and the government — not the contractor — bears the risk that work costs more than estimated. FAR 16.301-3 restricts cost-reimbursement to situations where an approved acquisition plan sits one level above the contracting officer, the contractor's accounting system can adequately track costs, and the government has personnel to provide surveillance during performance; the rule flatly prohibits cost-reimbursement for commercial products and services. Within the family, a cost contract pays no fee and is mostly used for research with nonprofits; cost-sharing has the contractor absorb an agreed-upon share of costs for expected future benefit; CPIF and CPAF tie fee to cost performance or the government's subjective judgment of quality; and cost-plus-fixed-fee (CPFF) sets a fee at the outset that doesn't change with actual costs, fit for research where cost estimation is genuinely difficult. CPFF fee is not unlimited — FAR 15.404-4(b)(4)(i), implementing 10 U.S.C. 3322(b) and 41 U.S.C. 3905, caps it at 15% of estimated cost (excluding fee) for experimental, developmental, or research work, and 10% for other CPFF contracts.
Time-and-Materials and Labor-Hour: The Disfavored Middle
FAR Subpart 16.6 covers time-and-materials (T&M) contracts, which pay direct labor hours at fixed hourly rates covering wages, overhead, G&A, and profit, plus the actual cost of materials; labor-hour (LH) contracts are identical except the government furnishes the materials. FAR is blunt about why these types are disfavored: they provide "no positive profit incentive to the contractor for cost control or labor efficiency," so the contracting officer may use one only "when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence." Before award, the contracting officer must sign a determination and findings that no other type is suitable — and if performance, including options, exceeds three years, the head of the contracting activity must approve it. Every T&M or LH contract must carry a ceiling price the contractor exceeds at its own risk, and the government must maintain surveillance to confirm efficient methods and cost controls are actually in use.
IDIQ: A Different Axis Entirely
Indefinite-delivery, indefinite-quantity contracts under FAR Subpart 16.5 answer a different question — not how price risk is allocated, but how the government buys when it doesn't know exact quantities or timing in advance. An IDIQ sets a guaranteed minimum and a ceiling maximum; actual work is ordered through task or delivery orders over the contract's life, and each order can itself be structured as FFP, cost-reimbursement, or T&M. GovConFeed's separate guide to IDIQ vehicles covers GWACs, MATOCs, and MACs.
The 2026 Shift: FFP Becomes the Default
Contract-type selection is no longer just a contracting officer's call. On April 30, 2026, President Trump signed an executive order, "Promoting Efficiency, Accountability, and Performance in Federal Contracting," stating that "fixed-price contracts with performance-based considerations should serve as the default and preferred method of procurement." Per Holland & Knight's client alert on the order, agencies now need written justification and agency-head (or delegated) approval before using cost-reimbursement, T&M, labor-hour, or hybrid arrangements above tiered thresholds — $100 million at the Department of War, $35 million at NASA, $25 million at DHS, $10 million elsewhere. Agencies had until July 29, 2026 to review their ten largest non-fixed-price contracts, and OFPP has 120 days from the order to propose FAR amendments codifying the preference.
What It Means for Contractors
The FAR text hasn't changed the underlying math: FFP still transfers cost risk to the contractor, cost-reimbursement still transfers it to the government, and T&M sits between with the weakest cost-control incentive of the three — why FAR treats it as a last resort requiring a signed determination and findings. What has changed is the pressure agencies are now under to pick FFP whenever possible, including on work that hasn't historically fit that structure well, like IT modernization or professional services with poorly defined requirements. Read solicitations for contract type as carefully as the statement of work: an agency defaulting to FFP on genuinely uncertain scope is effectively asking the contractor to price in risk the government used to absorb. Build explicit assumptions, exclusions, and — where performance runs long — economic price adjustment language into every FFP proposal rather than wait for the contracting officer to volunteer it. On CPFF work, know the statutory fee ceiling before negotiating so a below-cap offer isn't mistaken for the maximum available. On any T&M or labor-hour bid, expect harder questions about why fixed-price wasn't feasible, since that determination now sits inside an executive order's spotlight. Getting contract-type analysis right at proposal stage, not after award when pricing is locked, is the difference between a profitable period of performance and one spent negotiating change orders.
