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Understanding the types of government contracts is one of the most important steps any vendor can take before entering the public sector market. The contract type determines who bears financial risk, how you get paid, and how much administrative burden you will carry throughout performance.
This guide covers all 26 types of government contracts explained with real examples, and links to in-depth resources for each.
Main Type 1: Basic Types of Government Contracts
Before diving into specific contract structures, it helps to understand the two broad markets that government contracts fall into. They operate under different rules, different oversight bodies, and attract different types of vendors.
1. Federal Government Contracts
Federal contracts are agreements between a private vendor and a U.S. federal executive agency, the Department of Defense, Department of Health and Human Services, NASA, GSA, and hundreds of others. They are governed by the Federal Acquisition Regulation (FAR), a comprehensive, uniform rulebook that applies to all federal agencies.
Key characteristics of federal contracts:
- Governed by the FAR and agency-specific supplements (DFARS, HHSAR, etc.)
- Administered by warranted Contracting Officers (COs)
- Subject to DCAA audits on cost-type contracts
- May require Cost Accounting Standards (CAS) compliance for large contractors
- Opportunities posted on SAM.gov
- In FY2025, the federal government awarded approximately $681 billion in contracts (Source: Fed-spend.com)
Federal contracts range from simple purchase orders for off-the-shelf supplies to multi-billion-dollar defense programs spanning decades. They encompass every contract type covered in this guide, from Firm-Fixed-Price to OTAs.
2. SLED Contracts (State, Local, and Education)
SLED contracts are agreements between vendors and state governments, local governments (counties, cities, municipalities), school districts, and public universities and colleges. Unlike the federal market, which follows one uniform rulebook, the SLED market is governed by individual state and local procurement codes that vary significantly across jurisdictions.
Key characteristics of SLED contracts:
- Each state has its own procurement laws and regulations, no single rulebook equivalent to the FAR
- The annual procurement spending for the SLED (State, Local, and Education) market is approximately $1.5 trillion to $2 trillion.
- 110k agencies are included in SLED market.
- AI platforms like Pursuit.us helps SLED vendors find the early signals before RFPs are dropped, reach the right decision-makers and create AI-backed outreach to win more contracts.
- Administered by state procurement offices, county purchasing departments, or school district business offices
- Generally do not require DCAA-compliant accounting systems
- Dollar thresholds for competitive bidding vary by state and jurisdiction
- Opportunities posted on state procurement portals, BidNet, DemandStar, and agency websites
- Cooperative purchasing vehicles like NASPO ValuePoint, Sourcewell, and OMNIA Partners simplify access to thousands of SLED buyers at once
The SLED market is often larger and more accessible than many vendors realize. Combined state and local government spending represents trillions of dollars annually, and the procurement process is often less complex than federal contracting for smaller purchases.
Federal vs. SLED: Key Differences at a Glance
Main Type 2: Fixed-Price Contracts (FAR Subpart 16.2)
Fixed-price contracts place cost risk squarely on the contractor. The price is agreed upon before work begins and does not change; the contractor keeps any savings and absorbs any overruns. They are the most common contract type in both federal and SLED markets and work best when the scope of work is clearly defined and requirements are stable.
3. Firm-Fixed-Price (FFP)
The simplest and most widely used contract type in government. The price is agreed upon before work begins and does not change, regardless of what the contractor actually spends to get the job done. One price, one scope, no adjustments.
- Price is fully fixed at award: No adjustments for cost overruns, inflation, or changes in labor rates, unless a formal contract modification is issued.
- Contractor bears 100% of cost risk: Every dollar over budget comes out of the contractor's profit. Every dollar saved goes into it.
- Maximum incentive for cost control: Because the contractor keeps any savings, they are strongly motivated to work efficiently.
- Less government oversight during performance: The agency is not looking over your shoulder at every expense, you have the freedom to manage execution your way.
- Requires a well-defined scope: FFP works best when requirements are clear, stable, and unlikely to change significantly during performance.
- Governed by FAR 16.202: The Federal Acquisition Regulation defines FFP contracts and the conditions under which they are appropriate.
Read the full guide to FFP contracts →
4. Fixed-Price with Economic Price Adjustment (FPEPA)
An FFP variant that allows limited, pre-defined price adjustments tied to specific economic indexes, such as labor rate tables, established catalog prices, or market indexes. Used on longer-term contracts where inflation or material cost fluctuations create unreasonable risk for the contractor.
- Still a fixed-price contract: The base price is firm. Adjustments are only permitted under specific, pre-defined conditions, not at the contractor's general discretion.
- Both upward and downward adjustments: EPA clauses work both ways. If costs rise, the price can increase. If costs fall, the price must decrease. The government has the right to benefit from favorable market conditions, too.
- Three types of adjustment mechanisms (FAR 16.203-1):
- Established prices: Adjustments tied to increases or decreases in published or established catalog/market prices for specific items
- Actual costs of labor or material: Adjustments based on actual cost changes the contractor experiences during performance
- Cost indexes of labor or material: Adjustments tied to specific labor or material cost indexes identified in the contract
- Limits on adjustments: EPA clauses typically include a floor and a ceiling on adjustments. Under FAR 52.216-4, adjustments are available when costs increase more than 3%, with a maximum recovery of 10% of the original contract price.
- Governed by FAR 16.203.
5. Fixed-Price Incentive (FPI)
A fixed-price contract where profit adjusts based on how actual costs compare to a pre-agreed target, using a share ratio, ceiling price, and Point of Total Assumption (PTA). Widely used in DoD defense production and shipbuilding programs. Governed by FAR 16.403.
Comes in two forms:
- Firm Target (FPIF) and
- Successive Target (FPIS).
6. Fixed-Price Contracts with Prospective Price Redetermination
A fixed-price contract that sets a firm price for an initial period and allows prospective redetermination of the price for subsequent periods. Used when sufficient cost or pricing data is not available to set a firm price for the entire contract at award. Governed by FAR 16.205.
- Firm price for the initial period: The first period of performance has a fully locked-in price, just like an FFP contract.
- Prospective redetermination: Price adjustments are negotiated before each new period begins, not after. This is what makes it "prospective" rather than "retroactive."
- Each subsequent period must be at least 12 months: The FAR requires that redetermination periods be meaningful, not monthly or quarterly renegotiations.
- Optional ceiling price: The contract may include an overall ceiling price that limits how high the redetermined prices can go across all periods, providing a backstop for the government.
- Initial period should be the longest feasible: The FAR instructs contracting officers to make the first firm-priced period as long as possible. Redetermination periods come after the government has accumulated enough cost experience to price more confidently.
Read the full guide to Fixed-Price with Retroactive Price Redetermination →
7. Fixed-Ceiling-Price with Retroactive Price Redetermination
A rarely used variant for small R&D contracts at or below the Simplified Acquisition Threshold. A ceiling price is set upfront, and the final price is retroactively determined after performance, based on actual costs, within the ceiling. Governed by FAR 16.206.
- Fixed ceiling price: Established at contract award. The government will never pay more than this amount regardless of what the contractor actually spends. The ceiling may only be adjusted by standard equitable adjustment clauses.
- Retroactive price determination: The final price is settled after performance is complete, not before, based on a review of actual costs incurred.
- Small R&D contracts only: This contract type is appropriate only for research and development contracts at or below the Simplified Acquisition Threshold (SAT), currently $250,000. It is not used for large programs.
- Used only when FFP is impossible: The FAR requires that it be established at the outset that a firm fixed price simply cannot be negotiated and that the contract value and short performance period make other fixed-price types impracticable.
- Contractor accounting system required: The contractor must have an accounting system adequate for price redetermination.
Read the full guide to Fixed-Ceiling-Price with Retroactive Price Redetermination →
8. Firm-Fixed-Price Level-of-Effort (FFP/LOE) Term Contracts
A fixed-price contract where the contractor commits to providing a specified level of effort over a set time period, rather than delivering a specific end product. Used for research and investigation work where outcomes cannot be precisely defined upfront. Governed by FAR 16.207.
- Payment for effort, not results: The government pays for the agreed level of effort, not for a specific deliverable or measurable outcome. This is what fundamentally distinguishes FFP/LOE from standard FFP contracts.
- Fixed dollar amount: Despite being effort-based, the total payment is fixed. It does not vary with actual costs, hours logged slightly over or under target, or results achieved.
- Defined level of effort: The contract specifies the effort required, typically in person-hours, staff-months, or full-time equivalents, over a stated period of time.
- Work stated in general terms: The scope cannot be defined as a specific end product or measurable goal. The work is investigatory or exploratory in nature.
- Suitable for R&D investigation: FAR specifically identifies FFP/LOE as suitable for "investigation or study in a specific research and development area."
Read the full guide to FFP/LOE contracts →
Main Type 3: Cost-Reimbursement Contracts (FAR Subpart 16.3)
Cost-reimbursement contracts shift cost risk to the government. The contractor is paid back for all allowable costs incurred plus a fee. They are used when scope is uncertain, technical risk is high, or outcomes cannot be accurately priced in advance, such as in research, development, and complex engineering programs.
9. Cost Contract
A pure cost-reimbursement contract with no fee, the contractor is reimbursed for all allowable costs only, with zero profit. Used primarily for research and development work with nonprofit educational institutions. Governed by FAR 16.302.
10. Cost-Sharing Contract
The government reimburses only an agreed-upon portion of costs with no fee, used when the contractor expects substantial non-government benefit from the work and agrees to absorb a share of costs. Governed by FAR 16.303.
11. Cost-Plus-Incentive-Fee (CPIF)
Costs are reimbursed, and the fee varies based on how actual costs compare to an agreed target, using a share ratio with minimum and maximum fee limits. Rewards cost efficiency and penalizes overruns. More motivating than CPFF but more complex to administer. Governed by FAR 16.405-1.
12. Cost-Plus-Award-Fee (CPAF)
Costs are reimbursed and an award fee is earned based on the government's subjective evaluation of overall contractor performance, covering quality, schedule, cost control, and management. The Fee Determining Official (FDO) makes the final, unilateral decision. Heavily used by NASA and DoD for flagship programs. Governed by FAR 16.401(e).
13. Cost-Plus-Fixed-Fee (CPFF)
The most common cost-type contract. The government reimburses all allowable costs and pays a fixed fee negotiated upfront, which never changes regardless of actual spending. Fee is capped at 15% of the estimated cost for R&D and 10% for other work. Governed by FAR 16.306.
14. Cost-Plus-a-Percentage-of-Cost (CPPC) ❌
The fee is a fixed percentage of actual costs, the more the contractor spends, the higher the fee. This creates a direct incentive to overspend and is explicitly prohibited in federal contracting under FAR 16.102(c). Also prohibited for federally funded SLED programs under 2 CFR Part 200.
Main Type 4: Incentive Contracts (FAR Subpart 16.4)
Incentive contracts are designed to motivate contractors to exceed performance targets, on cost, schedule, or quality, by tying the fee or profit to measurable outcomes. They sit across both the fixed-price and cost-reimbursement families.
15. Fixed-Price Incentive Contracts (FPI)
A fixed-price contract with a profit adjustment formula based on cost performance. The final price is determined after completion based on actual costs vs. the target. Two subtypes:
- Firm Target (FPIF): All elements, target cost, target profit, ceiling price, and share ratio, are negotiated and locked in at award. The most common FPI type. Governed by FAR 16.403-1.
- Successive Targets (FPIS): An initial target is set when cost data is insufficient for a firm target; a definitive target is negotiated later as more data becomes available. Rarely used. Governed by FAR 16.403-2.
16. Cost-Reimbursement Incentive Contracts
Cost-Plus-Incentive-Fee (CPIF): The most widely used cost-type incentive contract. Costs are reimbursed and the fee varies based on cost performance against a target via a share ratio. (See Type 3 above for full description.)
Note: Cost-Plus-Award-Fee (CPAF) is sometimes discussed alongside incentive contracts due to its performance-based fee structure, but it formally sits within the cost-reimbursement family under FAR 16.3.
Main Type 5: Indefinite-Delivery Contracts (FAR Subpart 16.5)
Indefinite-delivery contracts establish a master agreement with pre-negotiated terms and prices, but no guaranteed quantity of work upfront. Individual orders are placed as needs arise throughout the contract period. These structures are the backbone of the federal IT and professional services market.
17. Definite-Quantity Contracts
A delivery-order contract that specifies a firm, fixed quantity of supplies or services to be delivered at designated locations on specified dates or within a set period. Unlike IDIQ, the quantity is fixed, not indefinite. Used when requirements are fully predictable but delivery timing needs flexibility. Governed by FAR 16.502.
18. Requirements Contracts
The government commits to purchasing all of its actual requirements for a specific supply or service exclusively from one contractor during the contract period. The quantity is not fixed upfront, but the vendor is the sole source for whatever the agency needs. Governed by FAR 16.503.
19. Indefinite-Quantity Contracts (IDIQ)
A master contract with a guaranteed minimum purchase and a maximum ceiling value. Individual task orders (for services) or delivery orders (for supplies) are placed as needs arise. Can be single-award or multiple-award. The foundation of major federal vehicles like GWACs and GSA Schedules. Governed by FAR 16.504.
Main Type 6: Time-Based Contracts (FAR Subpart 16.6)
Time-based contracts pay for labor hours at pre-agreed rates plus actual material costs. They are used when the scope or duration of work cannot be defined upfront. Because the government pays by the hour rather than for a finished product, these contracts require active government oversight.
20. Time-and-Materials (T&M) Contracts
The contractor bills pre-agreed hourly rates by labor category plus actual material costs. Must include a Not-to-Exceed (NTE) ceiling. Widely used for IT services, professional services, emergency response, and consulting in both federal and SLED markets. Governed by FAR 16.601.
21. Labor-Hour (LH) Contracts
A T&M variant where only labor hours are billed at fixed hourly rates, no materials component. Functionally identical to T&M but used for pure services work such as consulting, staffing, and analysis support. Governed by FAR 16.602.
22. Letter Contracts
A preliminary written contractual instrument that authorizes the contractor to begin work immediately before a definitive contract can be negotiated. Used only when the government cannot wait for a fully negotiated contract, such as in urgent or emergency situations. Must be superseded by a definitive contract as soon as possible. Governed by FAR 16.603.
Main Type 7: Other Government Contracts
These are procurement instruments and vehicles that sit outside or alongside the standard FAR contract families, used for specific strategic purposes in federal and SLED procurement.
23. Governmentwide Acquisition Contracts (GWACs)
Pre-competed, multiple-award IDIQ contracts specifically for IT solutions, available to all federal agencies. Recognized by OMB as Best-in-Class procurement vehicles. Major GWACs include Alliant 3, Polaris, 8(a) STARS III, VETS 2, and NASA SEWP. Governed by FAR 16.505.
24. Executory Contract
Any active contract where both parties still have obligations to fulfill, the work or payments are not yet complete. Most government contracts currently in performance are executory contracts. The term has particular legal significance in bankruptcy proceedings and contract modifications.
Read the full executory contract guide →
25. State Term Contracts
Statewide pre-negotiated contracts established by each state's central procurement agency, the SLED equivalent of a federal IDIQ or GSA Schedule. Any eligible state agency or authorized local buyer can purchase directly without running its own competitive bid. Available in all 50 states under various names, such as California CMAS, Texas DIR Cooperative Contracts, Florida State Term Contracts, and others.
26. Cooperative Purchasing Contracts
Pre-competed contracts that any eligible SLED agency can use regardless of which agency originally solicited them, the SLED equivalent of GWACs. Major cooperative vehicles include NASPO ValuePoint (state governments), Sourcewell (local governments and education), OMNIA Partners (broad public sector), and E&I Cooperative Services (higher education and K–12).
Other Terminologies Related to Government Contracts
These terms come up frequently in government contracting discussions; they are not contract types in themselves but are closely related procurement tools and arrangements every vendor should understand.
1. Contractor Teaming Arrangement
A formal pre-award agreement between two or more companies to jointly pursue a government contract, one serves as prime, the others as subcontractors. Does not create a new legal entity. Governed by FAR Subpart 9.6.
2. Other Transaction Authority (OTA)
A non-FAR agreement used primarily by DoD to acquire R&D and prototypes from innovative companies, including startups and non-traditional defense contractors. Faster and more flexible than standard contracts. DoD OTA obligations grew over 700% between FY2015 and FY2021.
3. GSA Multiple Award Schedule (MAS)
Long-term governmentwide IDIQ contracts through GSA offering commercial products and services at pre-negotiated prices to federal agencies, and to state and local governments through the Cooperative Purchasing Program. Over $51 billion in purchases annually.
4. Basic Ordering Agreement (BOA)
A written arrangement, not a contract, that pre-establishes terms, conditions, and pricing for future orders when quantities and delivery dates cannot be determined in advance. More complex than a BPA and typically used for higher-value procurement. Governed by FAR 16.703.
5. Blanket Purchase Agreement (BPA)
A pre-negotiated charge account with one or more vendors for repetitive purchases. No funds are obligated at setup, money is committed only when individual call orders are placed. Widely used across federal and SLED markets. Governed by FAR 13.303.
Frequently Asked Questions
What are the 4 types of government contracts?
The Federal Acquisition Regulation organizes federal contracts into four primary families:
(1) Fixed-Price Contracts, the contractor bears cost risk and the price is locked in before work begins;
(2) Cost-Reimbursement Contracts, the government pays actual costs plus a fee;
(3) Time-and-Materials / Labor-Hour Contracts, payment is based on hours worked and materials used; and
(4) Indefinite-Delivery Contracts, orders are placed as needed against a pre-established master agreement. This guide expands on those four families to cover all 7 types, including incentive contracts, special contract vehicles, and SLED-specific structures.
What is the most common type of government contract?
Firm-Fixed-Price (FFP) is by far the most common contract type in federal procurement by number of contract actions. It is also the dominant structure in the SLED market. Its simplicity, budget certainty, and minimal administrative burden make it the default choice whenever scope and requirements are well-defined.
What is the difference between a fixed-price and a cost-reimbursement contract?
In a fixed-price contract, the price is locked in before work begins, the contractor keeps any savings and absorbs any overruns. In a cost-reimbursement contract, the government pays the contractor's actual allowable costs plus a fee, shifting cost risk to the government. Fixed-price contracts are preferred when scope is clear; cost-reimbursement contracts are used when scope is uncertain or technical risk is high.
What type of government contract is best for small businesses?
It depends on your capabilities and risk tolerance. FFP contracts are accessible and widely available but require accurate cost estimating. T&M contracts are common in IT services and consulting with lower financial risk. IDIQ vehicles, particularly small business set-asides like 8(a) STARS III and Polaris, offer the best long-term revenue potential once awarded. For SLED, cooperative purchasing contracts like Sourcewell and NASPO ValuePoint are often the most accessible entry point.
What is the difference between federal and SLED contracts?
Federal contracts are governed by the FAR and apply uniformly across all federal executive agencies. SLED contracts are governed by individual state and local procurement laws, which vary significantly by jurisdiction. Federal contracts may require DCAA-compliant accounting for cost-type work; SLED contracts generally do not. Both markets use similar contract structures but the vehicles, rules, and oversight mechanisms are distinct.
Which contract type carries the most risk for vendors?
Firm-Fixed-Price carries the most financial risk for vendors, every dollar over budget is the contractor's problem. Among cost-type contracts, CPAF carries the most uncertainty around fee because the government's subjective evaluation determines your profit. The prohibited CPPC structure would carry zero financial risk for vendors, which is exactly why it was banned.
What contract type does the government prefer?
The federal government strongly prefers fixed-price contracts, particularly FFP, because they provide budget certainty and transfer cost risk to contractors. Cost-reimbursement contracts are used only when fixed-price is not feasible due to uncertainty or high technical risk.
How to Choose the Right Contract Type
Not sure which contract type applies to your situation? Use this simple decision framework:
- Is the scope clearly defined? → Fixed-Price (start with FFP)
- Some cost uncertainty but delivery required? → Fixed-Price Incentive (FPIF)
- Scope uncertain, high technical risk? → Cost-Reimbursement (CPFF, CPIF, or CPAF)
- Can't define scope or duration upfront? → Time and Materials (T&M)
- Recurring needs, uncertain quantities? → IDIQ or BPA
- Innovative technology; want to avoid FAR burden? → OTA
- Targeting SLED market? → Cooperative purchasing or state term contracts
- Need to combine capabilities to compete? → Contractor Teaming Arrangement
Explore our complete government contracting glossary at pursuit.us/glossary for in-depth guides on each contract type, including real examples, pros and cons, and SLED market applications.
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