Government Contract Pricing Types Explained: Fixed-Price, Cost-Reimbursement, and Time & Materials

You found a matching opportunity. You read the solicitation. Now comes the part that trips up almost every small business bidding on their first few federal contracts: figuring out what kind of contract it actually is — and pricing your proposal accordingly. Get the contract type wrong and you either price yourself out of a win or win a contract that quietly loses you money for the next 12 months.

Why Contract Type Matters More Than the Price Itself

Every federal solicitation specifies a contract type before it specifies a dollar amount. That type determines who carries the risk if the work costs more than expected — you, or the government. It also determines exactly how you're supposed to build your price proposal. Bidding a fixed price against a cost-reimbursement solicitation (or vice versa) isn't a minor formatting mistake; it's usually an automatic disqualification.

The contract type is listed in the solicitation itself, typically in Section B (Supplies or Services and Prices) or spelled out in the FAR clause references in Section I. If you can't find it, that's a question worth asking during the Q&A period rather than guessing.

The Three Contract Types You'll See Most Often

1. Firm-Fixed-Price (FFP)

The government agrees to pay one set price for the defined scope of work, regardless of what it actually costs you to deliver it. This is the most common contract type for well-defined requirements — janitorial services, IT hardware, landscaping, a specific deliverable with a clear scope.

Who carries the risk: You do. If your costs run over, you absorb the difference. If you run efficient, you keep the upside. This cuts both ways — FFP is where disciplined estimating pays off the most.

What your proposal needs: A price that's realistic enough to survive scrutiny but tight enough to be competitive. Padding it heavily to cover uncertainty usually just loses you the award to a competitor who priced it correctly.

2. Cost-Reimbursement (Cost-Plus)

The government reimburses your actual allowable costs, plus a fee (profit). Used when the scope is uncertain or the work is R&D-heavy — the agency genuinely doesn't know what the final cost will be, so it doesn't ask you to guess either.

Who carries the risk: Largely the government. But this comes with a catch — cost-reimbursement contracts require an approved accounting system that can segregate and track costs to government standards (often a DCAA-compliant system). Most small businesses aren't set up for this without deliberate investment, which is exactly why cost-reimbursement work tends to go to firms that have done it before.

What your proposal needs: Detailed cost buildups — labor categories and rates, materials, indirect rate structures (overhead, G&A, fringe) — not a single bottom-line number.

3. Time & Materials (T&M) / Labor Hour

You're paid a fixed hourly rate for labor (which includes wages, overhead, and profit) plus reimbursement for materials at cost. Common for staff augmentation, IT support, and services where the exact number of hours needed isn't known upfront.

Who carries the risk: Split. The government caps risk with a ceiling price; you carry the risk that your loaded hourly rate doesn't actually cover your costs plus a reasonable margin.

What your proposal needs: Fully burdened labor rates by category, justified against market rates (agencies check these against GSA schedule rates and salary survey data).

Quick Comparison

The Mistake That Costs Small Businesses the Most

The single most common pricing mistake isn't picking the wrong number — it's forgetting to load your rate correctly. A rate that only covers your employee's wage isn't a bid, it's a loss. Your price (or your loaded labor rate under T&M) needs to account for:

• Direct wages or salary
• Payroll taxes and statutory benefits (FICA, unemployment, workers' comp)
• Fringe benefits (health insurance, PTO, retirement match)
• Overhead (facilities, equipment, indirect labor)
• General & Administrative (G&A) costs
• Profit — a reasonable margin, not an afterthought

If you've never built a fully-loaded rate before, a PTAC (Procurement Technical Assistance Center) advisor will walk through this with you for free — it's one of the highest-value conversations a first-time bidder can have before submitting a price.

Deciding Whether to Bid at All

Not every contract type fits every business. If a solicitation is cost-reimbursement and you don't have a DCAA-compliant accounting system, that's often a disqualifying gap before you even get to price — no proposal quality fixes it. Knowing the contract type early, right when the opportunity is matched to you, saves the hours you'd otherwise spend drafting a proposal you were never going to be able to submit competitively.