Government Contracting for Beginners: Fixed Price vs. Cost-Reimbursement Contracts

Contract mechanisms are generally lumped into two broad categories: Fixed Price and Cost-Reimbursement. While both are valid under the Federal Acquisition Regulation (FAR), the risks, compliance burdens, and system requirements they carry are vastly different.

For businesses new to federal government contracting, understanding contract types is central to your success. Contract mechanisms are generally lumped into two broad categories: Fixed Price and Cost-Reimbursement. While both are valid under the Federal Acquisition Regulation (FAR), the risks, compliance burdens, and system requirements they carry are vastly different.

In this article, I’ll explain the key differences between fixed price and cost-reimbursement contracts, the implications for aspiring government contractors, and why Fixed Price is often the smarter choice for new entrants. We’ll also walk you through the steps needed to upgrade your internal systems if you plan to pursue Cost-Reimbursement contracts in the future.

What Is a Fixed Price Contract?

Under a Firm-Fixed Price (FFP) contract, the contractor agrees to deliver a product or service at a predetermined price. This price remains constant regardless of the actual costs incurred during performance. The contractor is then paid upon successful completion of a deliverable or level of effort (LOE).

Benefits of Fixed Price Contracts for New Contractors:

• Fewer regulatory requirements than cost reimbursement contracts

• No requirement for an approved accounting system

• More straightforward budgeting and invoicing

• Greater flexibility for small businesses with lean infrastructure

• No requirements to incur costs that comply with the FAR Part 31 cost principles

• If you complete the work under budget, you still earn the full price

• Costs incurred are not subject to DCAA audits

  
  

Risks to Consider:

• Mispricing can result in lost revenue or project failure

• Less room for scope negotiation once the contract is in place

• If you spend more than the fixed price to complete the work, your company absorbs the loss

  
  

What Is a Cost-Reimbursement Contract?

In contrast, Cost-Reimbursement contracts allow contractors to recover their allowable, allocable, and reasonable costs during contract performance. These include most commonly Cost Plus Fixed Fee (CPFF) and Time-and-Material (T&M) contract types, though other less frequently used variations of the cost-plus model exist.

Potential Advantages:

• Suitable for contracts where the scope of work cannot be precisely priced

• Reduced risk of out-of-pocket losses

• Encourages collaborative relationships with the government

  
  

Significant Drawbacks for New Contractors:

• Requires an adequate accounting system compliant with Standard Form 1408

• Subject to DCAA audit oversight

• Increased administrative burden, including:

  • Timekeeping controls

  • Cost segregation

  • Indirect cost rate calculations

  • Incurred cost submissions (ICS)

  • Compliance with FAR Part 31 Cost Principles

    
    

Why Fixed Price Contracts Are the Smarter Starting Point

For new and growing government contractors, the burden of compliance and the risk of audit findings under a cost reimbursable contract can quickly outweigh the benefits. Most companies new to government contracting likely do not have the required accounting system, timekeeping system, or compliant indirect cost rates established. Thus, you likely won’t even be considered a responsible source if you submit a bid on these efforts. Furthermore, to spend the resources to get these systems in place before you’ve established a track record and performance history may be a losing gamble.

Instead, seeking Fixed Price opportunities when you are starting out gives you time to grow as you go, by:

• Building contract performance history

• Refining your pricing models

• Developing compliant policies, procedures, and systems incrementally

• Focus on deliverables instead of regulatory hurdles

  
  

Preparing to Graduate to Cost-Reimbursement Contracts

If your long-term strategy includes pursuing cost-type contracts, early preparation is key. Akiri Consulting works with emerging government contractors and small businesses to upgrade their internal systems to meet government expectations.

If you have established a track record of implementing fixed price contracts or subcontracts, here's are the recommended next steps you can take to get started:

1. Establish a Segregated Chart of Accounts. Ensure direct, indirect, and unallowable costs are recorded properly.

2. Implement a DCAA-Compliant Timekeeping System. Must track labor hours daily, by contract and task, and include audit trails.

3. Develop and Monitor Provisional Indirect Cost Rates. These rates must be supportable, consistently applied, and take into account cost allowability considerations per FAR Part 31.

4. Write and Adopt Key Policies & Procedures. Timekeeping, purchasing, billing, cost allocation, travel, code of business ethics and conduct, and more.

5.  Request a Pre-Award Accounting System Review. Prepare for SF 1408 evaluations from DCMA, DCAA or your prime contractor.

6.  Use a Compliance Matrix to Track Requirements. Helps stay compliant with the contracts you do have and begin getting acquainted with the most commonly referenced FAR clauses.

How Akiri Consulting Can Help

Whether you're a small business just entering the federal space, a subcontractor preparing for prime opportunities, or a growing contractor planning to scale to cost-type work, Akiri Consulting provides the strategic and technical support needed to get you there. Our subscription plans and project-based advisory services are designed to meet you where you are, no matter your internal staffing levels or current system maturity.

Ready to Build a Smarter Compliance Foundation? Let’s talk about how our team can assess your current readiness, develop a compliance roadmap, and support your transition to more complex contract types.