Input-Based vs. Output-Based Federal Contracts
- Katherine Gentic
- Sep 9
- 5 min read
In government contracting, inexperienced companies may overlook or dismiss the importance of understanding the contract mechanism to be awarded. Focus is often on the technical capabilities and whether or not the organization can successfully deliver the government (or prime’s) requirements. However, a very important element of successful and profitable contract implementation is understanding the fundamental difference between two primary contract mechanisms: input-based and output-based contracts. This distinction determines what the government (or prime contractor) is buying, and it directly impacts a contractor's (or subcontractor’s) risk and responsibilities.
To provide a simple analogy to understand the difference between the two, imagine you need to build a new deck for your house. An input-based approach would mean hiring a carpenter and paying them by the hour for their time, plus the cost of materials. You are buying their effort and resources, not the final product. An output-based approach would likely mean agreeing on a fixed price for the completed deck, built to specific dimensions and standards. You're buying the finished product, not the hours or materials it took to build it.
Understanding Input-Based Contracts: Buying the "How"
Input-based contracts in federal government contracting include Time-and-Materials (T&M), Labor-Hour, Cost-Plus-Fixed-Fee (CPFF) Term, and Firm-Fixed-Price (FFP) Level of Effort (LOE) contracts. These mechanisms focus delivery requirements on the effort, or labor, a contractor provides, though the method of earning payment and/or fee/profit differs among them. The government or prime contractor specifies the "inputs" it needs, such as a certain number of labor hours from specific types of employees.
Let’s break down each of these mechanisms one by one, to fully understand how you would be paid.
T&M: You bill the government or prime contractor for your staff’s time using loaded rates (sometimes referred to as “wrap” or “burdened” rates). These rates are inclusive of salary, fringe, indirects, and profit. You are paid these loaded rates based on the hours worked and materials purchased.
Labor Hour: This mechanism is in essence a T&M without the Materials. You are paid for actual hours delivered using a burdened rate.
CPFF Term: This mechanism requires that you bill the government for all actual costs you incur. You may not bill loaded rates for labor; rather your invoices must break out gross salary to employees, fringe benefits, indirects, material costs, and fixed fee (profit). While you are reimbursed for all direct and indirect costs incurred up to a ceiling, you only earn your fee by delivering the amount of labor that is required in your contract. If you deliver all of the required labor, you earn your full fee.
FFP LOE: For this mechanism, you get paid a fixed price that is inclusive of all direct and indirect costs and profit, when you deliver a predetermined number of labor hours.
Note that in none of the above cases is the emphasis on delivering a product, report, or milestone. Therefore, nowhere in the contract should payment be tied to delivery of a product, report, or milestone.
So what are the benefits and risks with these input-based mechanisms?
The Benefits: For the contractor, the primary benefit is low risk. You get paid (or in the case of CPFF Term, earn your fee) for incurring labor, regardless of the project's final outcome or delivery of specific outputs. This model is ideal for projects with uncertain or evolving requirements, like research and development, where the final product, outcome, or milestone isn't clearly defined from the start.
The Risks: The downside for contractors is that you have less control and less incentive for efficiency. You may face micromanagement from the client, who is focused on your every move and may prescribe how labor is to be allocated among staff, and you have limited flexibility to use innovative or more efficient methods to complete the work.
Understanding Output-Based Contracts: Buying the "What"
Output-based contracts, including FFP or CPFF Completion contracts, emphasize the importance of final results. The contract clearly defines the specific, measurable deliverables or outcomes you must provide. The focus is on the "output" of your work, not the time and effort it took to produce it. Here’s a brief breakdown of these mechanisms, in contrast to input-based contracts:
FFP: Under this mechanism, you get paid a fixed amount when you deliver a specific product, report, or milestone.
CPFF Completion: Just like a CPFF Term type contract, this mechanism requires that you bill the government for all actual costs. You may not bill loaded rates for labor; rather your invoices must break out gross salary to employees, fringe benefits, indirects, material costs, and fixed fee. But unlike CPFF Term contracts, you earn your fee by delivering outputs as required in your contract. If you deliver all of the required deliverables, you earn your full fee.
Note that in none of the above cases is the emphasis on delivering labor. Therefore, there should no prescription for required labor hours in the contract.
So, what are the benefits and risks of output-based contracts?
The Benefits: For the contractor, this model offers greater autonomy and potential for higher profit. If you can deliver the required output efficiently and under budget, then under a Firm Fixed Price mechanism, you get to keep the savings. Under a CPFF Completion type, you effectively improve your profit margin if you spend less than the ceiling imposed on total direct and indirect costs (note that this can apply to CPFF Term, as well, in the event your actual salaries are cheaper than those you’d budgeted). This approach rewards innovation and smart management, giving you the freedom to choose the best way to get the job done.
The Risks: The biggest risk is financial. If the project takes longer or costs more than you estimated, you absorb those losses under fixed price contracts, and effectively reduce your profit margin under CPFF Completion. Not to mention, under CPFF contracts, you would need client approval to increase your total estimated direct and indirect costs to continue working. The risk of performance failure also falls on you; if the final deliverable doesn't meet the specified requirements, then under FFP you may not get paid at all, and under CPFF Completion, you may not earn your fee.
The Danger of Commingling Inputs and Outputs
One of the most significant pitfalls for new contractors is encountering a solicitation that commingles inputs and outputs. This happens when a client asks for specific labor inputs (e.g., "provide a project manager for 40 hours per week") but then ties payment to a specific output (e.g., "payment will be made only upon delivery of a fully functioning software module”).
This creates a dangerous disconnect. The contractor is obligated to provide the inputs while also bearing the risks of an output-based contract. If you follow the strict input requirements but fail to produce the output, you may not get paid for the work you've already done. Commingling these mechanisms is a major red flag that indicates the client may not have a clear understanding of its own requirements. If you encounter a solicitation that commingles input requirements with output requirements, be sure to raise a question during the Q&A period and push during negotiations to ensure the contract requirements align with the mechanism.
Key Takeaways
Before you bid on any contract - whether with the federal government directly or as a subcontractor to a prime - read the solicitation carefully. Ask yourself, “Is the client buying my time and resources (inputs)? Or are they buying a specific, measurable result (outputs)?”
Understanding the difference is critical to assessing your risk and pricing your services appropriately, and is a foundational skill for navigating the complexities of government contracting.
