Federal contract types, explained

A contract type is the pricing arrangement that decides who bears the cost of performance and how profit is earned. FAR 16.101, in the codified Federal Acquisition Regulation (FAR), says types vary by the degree and timing of the contractor's responsibility for costs and by the profit incentive offered. The range runs from firm-fixed-price, where the contractor has full responsibility for costs and the resulting profit or loss, to cost-plus-fixed-fee, where the contractor has minimal responsibility and the fee is fixed. The Department of Defense (DoD) now applies the FAR Overhaul's Part 16 under class deviation 2026-O0045, effective March 16, 2026.

Who carries the cost risk

Type	How the contractor is paid	Cost overruns fall on
Firm-fixed-price	A set price, not adjusted for actual cost	Contractor
Fixed-price incentive (firm target)	Target cost and profit, adjusted by formula up to a ceiling	Shared by formula; contractor above the ceiling
Cost-plus-fixed-fee	Allowable costs plus a fee fixed at award	Government, within the cost ceiling
Cost-plus-award-fee	Allowable costs, any base fee, plus award fee earned	Government; award fee tracks performance
Time-and-materials	Fixed hourly rates plus materials at cost	Government, up to the ceiling price

Under overhaul 16.202-1, a firm-fixed-price contract may carry an award fee or performance and delivery incentives based solely on factors other than cost, and it remains firm-fixed-price.

Fixed-price types

Codified FAR 16.202-1 says a firm-fixed-price contract "places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss," with the maximum incentive to control costs and a minimum administrative burden. The overhaul text keeps the core definition, a price not adjusted for the contractor's experience in performing, drops the sentence on risk, and calls the type suitable when clear specifications let the contracting officer set fair and reasonable prices at the outset. Overhaul 16.102 makes fixed-price types "the default and preferred contract types" and requires firm-fixed-price when risk is minimal or can be predicted with acceptable certainty.

A fixed-price incentive (firm target) contract fits when firm-fixed-price does not. Under overhaul 16.404-1, it sets a target cost, a target profit, a price ceiling, and a profit adjustment formula. A final cost below target raises profit; a final cost above target lowers it, possibly to a net loss. Above the ceiling, the contractor absorbs the difference. The type needs an adequate accounting system and enough cost or pricing information to set firm targets.

Cost-reimbursement types

A cost-reimbursement contract pays allowable incurred costs, up to an estimate that sets a ceiling the contractor may not exceed, except at its own risk, without contracting officer approval. The overhaul text allows the type only when requirements cannot be defined well enough for fixed price, or uncertainties prevent an accurate cost estimate. It also requires an acquisition plan approved above the contracting officer, an adequate accounting system, and Government resources to manage the contract. Commercial products and services are excluded.

In a cost-plus-fixed-fee contract the fee does not change with actual cost. Codified FAR 16.306 says the type permits efforts that "might otherwise present too great a risk to contractors" but gives "only a minimum incentive to control costs," and lists research and development and test as examples. The overhaul's 15.404-9 caps the fee at 15 percent of estimated cost for experimental, developmental, or research work and 10 percent for other cost-plus-fixed-fee contracts.

A cost-plus-award-fee contract adds an award fee earned for excellence in cost, schedule, and technical performance. The head of the contracting activity signs a determination and findings, and an award-fee plan must use Table 16-1. An Excellent rating can earn 91 to 100 percent of the pool, Very Good 76 to 90, Good 51 to 75, and Satisfactory no more than 50. Unsatisfactory earns zero, and rolling unearned fee into a later period is prohibited.

Time-and-materials

A time-and-materials contract pays direct labor hours at fixed hourly rates that include wages, overhead, general and administrative expense, and profit, plus materials at actual cost. The overhaul text allows it only when the extent or duration of the work cannot be estimated accurately at award. The type "provides no positive profit incentive" for cost control, so the Government must watch performance. The contracting officer must sign a determination and findings that no other type is suitable. The head of the contracting activity approves it when base and option periods exceed three years. The contract must carry a ceiling price that the contractor exceeds at its own risk. Without adequate price competition, a noncommercial contract must state separate rates for the contractor, each subcontractor, and each affiliate under common control.

The 2026 fixed-price default

Executive Order 14402, signed April 30, 2026, makes fixed-price contracts the default. The order cites a review that found approximately $120 billion obligated in fiscal year 2024 on cost-reimbursement consulting contracts alone. Any non-fixed-price contract must be justified in writing by the contracting officer to the agency head. The agency head must approve in writing when the non-fixed-price value exceeds $100 million for the Department of War, $35 million for NASA, $25 million for Homeland Security, or $10 million elsewhere. Contracts for an emergency, major disaster, or contingency operation, and research and development or pre-production development for major systems, are exempt from that approval.

The overhaul text, updated July 1, 2026, carries the rule in a new section 16.104 and sets the thresholds "at or above" those amounts, where the order says "exceeds." Firm-fixed-price, level-of-effort term contracts count as covered too. Multiple-award contracts are exempt, but orders under them are not. Separately, the DoD deviation bars cost-reimbursement line items for production on major defense acquisition programs, with one exception.

What to check

• Which Part 16 text governs: codified FAR, or the overhaul text DoD has used since March 16, 2026?
• For a type other than fixed-price, does the file explain why fixed price will not work and how to move to it later?
• For a DoD covered contract at or above $100 million, is the agency head's approved justification under Executive Order 14402 on file, or does an exception apply?
• For a fixed-price incentive contract, are the target cost, target profit, and ceiling price stated for each item?
• For cost-plus-fixed-fee work, is the fee within the 15 percent or 10 percent statutory cap?
• For time-and-materials, is there a signed determination that no other type is suitable, and a ceiling price?

Sources

1. 1FAR 16.101 General · Acquisition.gov, FAC 2026-01, effective March 13, 2026
2. 2FAR 16.202-1 Description · Acquisition.gov, FAC 2026-01, effective March 13, 2026
3. 3FAR 16.306 Cost-plus-fixed-fee contracts · Acquisition.gov, FAC 2026-01, effective March 13, 2026
4. 4FAR Overhaul - Part 16 · Acquisition.gov, FAR Overhaul (Part 16 issued September 30, 2025, updated July 1, 2026)
5. 5FAR Overhaul - Part 15 · Acquisition.gov, FAR Overhaul (Part 15 issued September 30, 2025)
6. 6Class Deviation - Revolutionary Federal Acquisition Regulation (FAR) Overhaul Part 16, Defense FAR Supplement (DFARS) Part 216 (DARS Tracking Number 2026-O0045) · Defense Pricing, Contracting, and Acquisition Policy, effective March 16, 2026
7. 7Executive Order 14402, Promoting Efficiency, Accountability, and Performance in Federal Contracting · Federal Register, 91 FR 24325 (signed April 30, 2026; published May 5, 2026)

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