Fixed-Price vs Cost-Reimbursement Contracts
Understanding the two fundamental contract pricing structures and their implications.
Fixed-Price
Contracts where the price is set at award and the contractor bears the risk of cost overruns. Includes Firm Fixed-Price (FFP) and Fixed-Price Incentive (FPI) variants.
Cost-Reimbursement
Contracts where the government reimburses the contractor for all allowable costs incurred, plus a fee. Includes Cost-Plus-Fixed-Fee (CPFF) and Cost-Plus-Incentive-Fee (CPIF) variants.
| Dimension | Fixed-Price | Cost-Reimbursement |
|---|---|---|
| Cost Risk | Contractor bears all cost overrun risk | Government bears most cost risk |
| Profit Potential | Higher — efficiency savings go to contractor | Lower — fee is typically fixed or capped |
| Accounting Requirements | Standard commercial accounting sufficient | Requires compliant cost accounting system (CAS) |
| Government Oversight | Lower — focused on deliverables | Higher — audits of costs and accounting |
| Pricing Approach | Must include risk reserves in price | Costs reimbursed at actuals; fee negotiated separately |
| Best Suited For | Well-defined scope, production, routine services | R&D, undefined scope, high-risk/uncertain work |
Key Takeaway
The choice between fixed-price and cost-reimbursement depends primarily on how well-defined the work scope is and who should bear the cost risk. Fixed-price contracts are the government's preference when requirements are clear because they provide cost certainty. Cost-reimbursement contracts are used when the scope is uncertain or the work carries significant technical risk that would make a fixed price unreasonable.
When to Use Each
Fixed-Price
Ensure your cost estimates are thorough and include appropriate risk reserves. Underpricing a fixed-price contract can lead to financial losses. Focus on efficiency in execution since savings flow directly to your bottom line.
Cost-Reimbursement
Ensure your accounting system is compliant before pursuing these contracts. Focus on demonstrating cost control capabilities and realistic cost estimates. The government will scrutinize your indirect rates and cost reasonableness.
Related Comparisons
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