Fixed Price vs. Time & Material Contracts

by | Oct 29, 2019 | Blog

Contract type is a term to signify differences in contracts and their structures; including but not limited to compensation arrangements, amount of risk (either government or contractor).  Contract types vary according to:

  • The degree and timing of the risk assumed by the contractor for the cost of performance
  • The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specific standards or goals.  
  • While there are a dozen contract types the table below highlights a Fixed price & Time and Material Contract.

Contract Type
Description
Applications
Firm Fixed Price (FFP) Contract
Provides supplies or services for a specific price not subject to any adjustment on the basis of the contractor’s incurred costs.  This contract type imposes minimum administrative burden.
Contract is generally favorable because the contractor assumes the risk of increase performance costs.  Used for acquiring supplies and services with reasonably definite specifications, and reasonable prices can be established at the outset.
Time & Material ContractAcquires supplies or services on the basis of:
Direct labor hours at specified fixed hourly rates that include wages, overheard, general expenses, and profit.
Actual cost for materials including:
Direct Materials 
Subcontractors for supplies and incidental services for which there is not a labor category specified in the contract;
Other direct costs (travel, computer usage, etc.)
Applicable indirect costs.  Material handling costs shall include only costs clearly excluded from the labor-hour rate.		Used only when it is not possible at the time of placing the contract to estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence.  Used only when the contracting officer determines that no other contract type is suitable. When acquiring commercial services, a time and materials or labor hours contract may be used only when the award of the contract or order is made using competitive procedures.
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