This document summarizes various contract types including fixed-price, cost-reimbursable, and time and materials contracts. It provides details on key contract types such as firm fixed price (FFP), cost-plus-fixed-fee (CPFF), cost-plus-incentive-fee (CPIF), and time and materials (T&M). For each contract type, it outlines essential elements, conditions for use, advantages, and limitations. The document aims to help procurement professionals understand what types of contracts are suitable for different project needs based on certainty of requirements and ability to estimate costs.

1. Shantanu Bhamare, PMP
sbhamare@yahoo.com
Contract Types
Contract Type Application and Essential
Elements
Suitability Limitations
Fixed-price or lump-sum contracts
This category of contract involves a fixed total price for a well-defined product. To the extent that the product is not well defined, both the buyer and
seller are at risk--the buyer may not receive the desired product or the seller may need to incur additional costs to provide it. Greater risk on
contractor.
Firm Fixed Price (FFP)
The price is set and fixed by unit of
product or measure. Contractor
maximum risk and full
responsibility for all costs and
resulting profit.
Example: Contract = $1,100,000.
Reasonably definite design or
performance specification available
Fair and reasonable price can be
established at outset.
Conditions For Use:
Prior purchase experience of the
same, or similar, supplies or
services under competitive
conditions.
Valid cost or pricing data.
Realistic estimates of proposed
cost.
Possible uncertainties in
performance can be identified and
costed.
Contractor willing to accept
contract at a level which causes
them to take all financial risks.
Any other reasonable basis for
Advantages:
1) Less work for buyer to manage.
2) Seller has a strong incentive to
control costs.
3) Companies have experience
with this form.
4) Buyer knows the total price at
project start.
Used when sealed bid is involved.
Used for acquiring supplies and
services and/or for acquiring
commercial items. Simplest form is
a Purchase order; supply what is
required at agreed time and cost.
Commercial products and
commercial type products, military
items for which reasonable prices
can be established, and services.
Disadvantages:
1) Seller may underprice the work
and try to make up profits on
change orders.
2) Seller may not complete some
of the scope of work if they
begin to lose money.
3) More work for buyer to write
the scope of work.
4) Can be more expensive than
CR if the scope of work is
incomplete. The seller will need
to add to the price for their
increased risk.
Price not subject to adjustment
regardless of contractor
performance costs.
Places 100% of financial risk on
contractor.
Places least amount of
administrative burden on
contracting officer.

2. Shantanu Bhamare, PMP
sbhamare@yahoo.com
pricing can be used to establish fair
and reasonable price.
Preferred over all other contract
types.
Used with advertised or negotiated
procurements.
Fixed-Price Incentive Fee (FPIF or
FPI)
An FPI contract specifies a target
cost, a target profit, a price ceiling
and a profit adjustment formula.
Example: Contract = $1,100,000.
For every month you finish the
project early, you will receive
$10,000.
The FPI contract provides a profit
motive for the contractor to
perform efficiently from a cost
perspective. If the contractor
completes the contract while
incurring less cost that originally
anticipated, the contractor will
receive more profit.
Contract must contain: target cost,
target profit, ceiling price, and
profit sharing formula.
Used when a fixed-firm contract is
not appropriate
Supplies/services can be acquired
at lowers costs, with improved
delivery or improved technical
performance.
Development and production.
Contracting officer must determine
that the contract type is least costly
and award of any other type would
be impractical.
Buyer and contractor
administrative effort is more
extensive than under other fixed
price contract types.
Used only with negotiated
procurements.
Billing prices must be established
for interim payment
Fixed Price with Economic Price
Adjustment (FPEPA) or (FPEA)
Sometimes a fixed price contract
allows for price increase or
decreases if the contract is for
multiple years.
Example: Contract = $1,100,000
but a price increase will be allowed
in year 2 based on the US
Consumer Pricer Increase Report
for year 1. Or the contract price is
$1,100,000 but a price increase will
be allowed in year 2 to account for
increases in specific material costs.
Unstable market or labor
conditions during the production
period and contingencies which
would otherwise be included in the
contract price can be identified and
made the subject of separate price
adjustment clauses.
Revision of prices for specific
contingencies.
i. Adjustments based upon
increases or decreases from an
agreed upon level in either
published or established market
prices for specific items.
ii. Adjustments based upon actual
increases or decreases in the price
of specific items of cost or specific
labor that the contractor incurs.
Price can be adjusted up or down
upon action of an industry wide
contingency which is beyond
contractor's control.
Reduces contractors fixed price
risk.
Fixed price with EPA is preferred
over any cost reimbursement type
contract.
If contingency manifests, the
contract administration burden will
increase.
Used with negotiated procurements
and, in limited applications. With
formal advertising when
determined to be feasible.
Commercial products and
commercial type products, military
items for which reasonable prices
can be established at time of award,
and services.

3. Shantanu Bhamare, PMP
sbhamare@yahoo.com
iii. Adjustments based upon
increases or decreases in the
specific labor or material cost
standards or indexes, such as
Bureau of Labor Standards indices.
Purchase Order
Example: Contract to purchase 30
linear meters of wood at US $9 per
meter.
A form of contract that is normally
unilateral (signed by one party)
instead of bilateral (signed by both
parties). It is usually used for
simple commodity procurements.
Supply what is required at agreed
time and cost.
Cost Reimbursable(CR)
The seller’s costs are reimbursed but the buyer has the most cost risk because the total cost are unknown. This form of contract is often used when
the buyer can only describe what they need rather than what to do. Cost-reimbursement contracts are suitable for use only when uncertainties
involved. Example: Used for research and development contracts.
Costs are usually classified as direct costs or indirect costs. Direct costs are costs incurred for the exclusive benefit of the project (e.g., salaries of
full-time project staff). Indirect costs, also called overhead costs, are costs allocated to the project by the performing organization as a cost of
doing business (e.g., salaries of corporate executives).
Cost-Plus-Fee (CPF) or Cost-
Plus-Percentage of Cost (CPPC)
Seller is reimbursed for allowable
costs for performing the contract
work and receives a fee calculated
as an agreed-upon percentage of
the costs. The fee varies with the
actual cost.
Example : Contract = Cost +
10% of costs as fee.
This is an illegal form of contract
for the US Government and is bad
for buyers everywhere.
Sellers are not motivated to control
costs because the seller will get
profit on every cost without limit.

4. Shantanu Bhamare, PMP
sbhamare@yahoo.com
Cost-Plus-Fixed-Fee (CPFF)
Seller is reimbursed for allowable
costs for performing the contract
work and receives a fixed fee
payment calculated as a percentage
of the estimated project costs. The
fixed fee does not vary with
actual costs unless the project
scope changes.
Example : Contract = Cost + a
fee of $100,000
This is the most common form of
cost reimbursable contract.
Helps to keep the seller’s costs in
line because a cost overrun will
not generate any additional fee or
profit
Level of effort is unknown, and
contractor's performance cannot be
subjectively evaluated.
Advantages:
1) Simple scope of work.
2) Usually requires less work to
write the scope than fixed
price.
3) Generally lower cost than
fixed price because the seller
does not have to add as much
for risk.
Research or other development
effort when the task can be clearly
defined, a definite goal or target is
expressed, and a specific end
product is required.
Research, preliminary exploration
or a study when the level of effort
is initially unknown can be used for
development and test when a CPIF
is determined to be impractical.
Disadvantages:
1) Requires auditing seller’s
invoices.
2) It requires more work for the
buyer to manage.
3) Seller has only a moderate
incentive to control costs.
4) The total price is unknown.
Least preferred type because
contractor assumes no financial
risk.
Used only with negotiated
procurements
Cost-Plus-Incentive-Fee (CPIF).
Seller is reimbursed for allowable
costs for performing the contract
work and receives a
predetermined fee, an incentive
bonus, based upon achieving
certain performance objective
levels set in the contract. In some
CPIF contracts, if the final costs are
less than the expected costs, then
both the buyer and seller benefit
from the cost savings based upon a
pre-negotiated sharing formula.
Example : Contract = Cost + a
fee of $100,000. For every month
Development has a high probability
that it is feasible and positive profit
incentives for contractor
management can be negotiated
Performance incentives must be
clearly spelled out and objectively
measurable.
Fee range should be negotiated to
give the contractor an incentive
over various ranges of cost
performance.
Fee is adjusted by a formula
negotiated into the contract in
accordance with the relationship
Major systems development and
other development programs where
it has been determined that this
contract type is desirable and
administratively practical.
Difficult to negotiate range
between the maximum and
minimum fees so as to provide an
incentive over entire range.
Performance must be objectively
measurable
Used only with negotiated
procurements.

5. Shantanu Bhamare, PMP
sbhamare@yahoo.com
the project is completed sooner
than agreed upon, seller receives
and additional $10,000.
that total allowable cost bears to
target cost.
Contract must contain: target cost,
target fee, minimum and maximum
fees, and fee adjustment formula.
Fee adjustment is made upon
completion of contract
Cost-Plus-Award-Fee (CPAF) :
This type of cost reimbursable
contract type pays all costs and an
appropriate of a bonus based on
performance. This contract is very
similar to CPIF contract.
Contract completion is feasible,
incentives are desired but
performance not susceptible to
finite measurement.
Provides for SUBJECTIVE
evaluation of contractor
performance.
Contractor is evaluated at stated
time(s) during performance period.
Contract must contain clear and
unambiguous evaluation criteria to
determine award fee.
Award fee is earned for
excellence in performance,
quality, timeliness, ingenuity and
cost effectiveness and can be
earned in whole or in part.
Level of effort services that can
only be subjectively measured, and
contracts for which work would
have been accomplished under
another contract type if
performance objectives could have
been expressed as definite
milestones, targets, and goals
susceptible of being actually
measured.
Weighted guidelines will NOT be
used to determine either base or
award fee.
Buyer's determination of amount of
award fee earned by the contractor
is NOT subject to disputes clause.
CPAF contract cannot be used to
avoid either CPIF or CPFF types if
either is feasible.
Should not be used if the amount of
money, period of performance or
expected benefits are insufficient to
warrant additional administration
effort.
Time and Material (T&M) contracts--T&M contracts are a hybrid type of contractual arrangement that contains aspects
of both cost-reimbursable and fixed-price-type arrangements.
T&M contracts resemble cost-type arrangements in that they are open ended, because the full value of the arrangement is not defined at the
time of the award. Thus, T&M contracts can grow in contract value as if they were cost-reimbursable-type arrangements. Conversely, T&M
arrangements can also resemble fixed-unit arrangements when, for example, the unit rates are preset by the buyer and seller, as when both parties
agree on the rates for the category of "senior engineers." The buyer has a medium amount of cost risk compared to CR & FP.

6. Shantanu Bhamare, PMP
sbhamare@yahoo.com
Example : Contract = $100 /
Hour + expenses ormaterial at
cost or $5 per linear foot of wood.
Most appropriate when the
buyer wants to be more in
control.
It is also used in an emergency to
begin work immediately when a
scope of work has not yet been
completed.
Not possible at time of placing
contract to estimate extent or
duration of the work, or anticipated
cost, with any degree of
confidence.
Calls for provision of direct labor
hours at specified hourly rate and
material at cost (or some other
basis specified in contract).
Ceiling price established at time of
award.
Advantages:
1) Quick to create.
2) Contract duration is brief
3) Good choice when you are
hiring “bodies” or people to
augment your staff.
Engineering and design services in
conjunction with the production of
supplies, engineering design and
manufacture of dies, jigs, fixture,
gauges, and special machine tools;
repair, maintenance and overhaul
work to be performed in
emergencies.
Disadvantages:
1) Profit is in every hour billed.
2) Seller has no incentive to
control costs.
3) Appropriate only for small
projects.
4) Requires the most day-to-day
oversight from the buyer.
Should not be used for long-term
projects because the amount of
profit grows over time and there
is little incentive for the sellerto
complete the work.
Used only after determination that
no other type will serve purpose.
Does not encourage effective cost
control.
Ceiling price required in contract.