One of the first things you will see in any solicitation is the contract type — and it changes everything about how you bid, how you get paid, and who bears the risk if costs run higher than expected. The two types small contractors meet most often are firm-fixed-price (FFP) and cost-plus (usually cost-plus-fixed-fee, or CPFF). Understanding firm fixed price vs cost plus is essential before you price a bid, because the same scope of work can be profitable under one type and ruinous under the other.
Firm-Fixed-Price: A Set Price for a Defined Job
Under a firm-fixed-price contract, you agree to deliver a defined product or service for a set price, and that price does not change — even if your costs turn out higher than you expected. The government pays the agreed price when you deliver, and your profit is the difference between that price and your actual cost. If you deliver efficiently, you keep the savings. If you underestimate, you absorb the loss.
FFP contracts are the government’s preferred type when the work is well defined: the scope is clear, the deliverables are known, and the risk of the unknown is low. For the contractor, FFP rewards good estimating and efficient execution. It also punishes bad estimating harder than any other contract type, because there is no mechanism to recover costs that exceed the price. This is why the work in our guide on how to price a government contract bid matters so much on FFP work: your price is your promise, and the government will hold you to it.
FFP is the most common type for commercial services, supplies, and straightforward projects. If you are new to federal contracting, most of your early wins are likely to be firm-fixed-price — and that is fine, provided you price carefully and understand exactly what the statement of work requires before you commit to a number.
Cost-Plus: The Government Reimburses Your Costs
Under a cost-plus contract, the government reimburses your allowable costs and pays you a fee — a fixed dollar amount (cost-plus-fixed-fee) or, less commonly, an award or incentive fee tied to performance. If your costs run higher than estimated, the government pays the additional allowable costs, up to a ceiling set in the contract. Your fee stays the same; your profit does not grow with your costs, which removes the incentive to inflate them.
Cost-plus contracts are used when the work cannot be defined well enough to price in advance — research and development, complex engineering, or a new service where the effort is genuinely uncertain. Because the government bears the cost risk, it also demands more oversight: an approved accounting system, regular cost reporting, and audits. A contractor without an adequate accounting system generally cannot win a cost-reimbursement contract at all, which is one reason small businesses usually start with firm-fixed-price work.
Who Bears the Risk?
The difference between the two types is, at its core, a difference in who bears the risk. In a firm-fixed-price contract, the contractor bears the risk: costs above the price come out of your profit. In a cost-plus contract, the government bears the risk: costs above the estimate are reimbursed, as long as they are allowable and within the ceiling. That single difference explains the trade-off. FFP offers higher potential profit and simpler administration, but it demands accurate pricing and disciplined execution. Cost-plus offers lower risk and a guaranteed fee, but it demands an approved accounting system, heavy reporting, and acceptance of government oversight of your costs.
The fee also differs. On an FFP contract, your profit is whatever you can earn above your costs — it is not capped by the contract, only by competition. On a CPFF contract, the fee is negotiated up front and is typically limited by regulation (generally no more than 15 percent of estimated cost for experimental or research work, and lower for other services). So a cost-plus contract is safer, but it will rarely be the most profitable contract you hold.
Which Type Fits Your Bid?
The contract type is usually chosen by the government, not by you — the solicitation states it, and you bid accordingly. Your job is to read that choice and adapt your bid. If the solicitation is firm-fixed-price, your pricing must be precise and your scope understanding complete; build in a contingency for the risks you can foresee, and make sure your technical proposal and your price tell the same story about hours and effort. If it is cost-plus, your cost estimate must be realistic and documented, your accounting system must be adequate, and your fee proposal must be reasonable — and remember that a cost-plus bid still gets a realism check, so an unrealistically low estimate can still lose you the award.
Sometimes a solicitation mixes types — a firm-fixed-price base with cost-reimbursable elements, or a fixed-price contract with a cost-plus option. Read the pricing instructions in Section B and Section L carefully, and make sure each line item is priced under the right rules. A mixed-type bid priced as if it were all one type is a bid that will not survive evaluation. And when you are building the price itself, our guide on how to build a price proposal walks through the cost volume step by step.
The Other Types You Will Meet
Beyond the two main types, you will see a few variations. Time-and-materials (T&M) contracts pay a fixed hourly rate for labour plus materials at cost — common for services where the scope is uncertain but the labour categories are known. Labour-hour contracts are similar, without the materials element. Indefinite-delivery contracts (IDIQ) are not a pricing type but a vehicle: the pricing type is set at the task-order level, so one IDIQ can produce both FFP and cost-plus orders. And incentive contracts — fixed-price-incentive or cost-plus-incentive-fee — share savings or overruns between the government and the contractor against a target, rewarding performance that beats the target.
Each type has its own rules in the Federal Acquisition Regulation, and each changes how you should think about risk. Before you bid on any contract type you have not used before, read the relevant FAR part and the pricing instructions in the solicitation — and if the type involves cost reimbursement, confirm your accounting system is ready before you invest in the bid. The contract type is not a detail. It is the deal.
Related Guides
Firm Fixed Price vs Cost Plus: Pick the Right Type Before You Bid
The firm fixed price vs cost plus decision usually comes down to how well the work is defined. When you compare firm fixed price vs cost plus side by side, the real question is who bears the risk if costs run higher than expected. If the statement of work is clear and the scope is unlikely to change, fixed price rewards good estimating — and our guide to how to price a government contract bid shows how to build that number. When the scope is uncertain, a cost-plus arrangement protects you from costs you cannot predict, and the fee is your profit.
Before you commit, run a firm fixed price vs cost plus comparison against your own risk tolerance. In a firm fixed price vs cost plus decision, price the risk into the bid — the bid pricing mistakes that lose contracts are the traps to avoid. The Federal Acquisition Regulation sets out every contract type and when each one applies, so read FAR Part 16 before you sign.
Get the firm fixed price vs cost plus choice right, and the contract type works for you instead of against you.
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