The Different Types of Government Contracts

Why Work For The Government?

There are many compelling reasons to work for the Federal Government.  We will go into in-depth detail about how a small business can benefit greatly from being a government contractor.

Being A Government Contractor Is A Great Way To Make Your Business Stand Out In An Overcrowded Field

Business can be very competitive. Working on government projects is a great way to make a mark in an oversaturated market. The government has a great deal of work specifically set aside for small businesses.

Also, many small businesses often do not want to deal with the hassle of working with the government, and sometimes there can be surprisingly little competition for a government project. That is why utilizing Sam Directory to handle all the confusing registration requirements is a very smart investment. 

The United States Government Is A Very Powerful Client With Deep Pockets

The Federal government usually spends around 500 billion dollars a year on goods and services. This makes the U.S. government an extremely attractive client. There are few other organizations with this type of spending power and clout.

The government also tends to buy goods and services in bulk. If your business has the infrastructure to handle large orders, then the government can help you grow substantially at an accelerated pace.

Government agencies also buy goods and services in large quantities. Large orders can be a double-edged sword for small businesses. However, if managed correctly, they can help you grow substantially and rapidly.

Small Businesses Are Given Special Consideration When It Comes To Government Contracts

In many markets, small businesses are often outcompeted by larger organizations that often have access to almost unlimited resources. This set aside actually might increase a small business’s chances of winning a lucrative bid.

The federal government is required to set aside at least 23 percent of its total spending specifically for small businesses. Several small businesses have made a fortune just on federal government contract awards. However, before companies bid for contracts, it is important to understand the different types of contracts utilized by the government.

Time and Materials Contracts

The government rarely awards this type of contract because of the expense. A Time and Material Contract requires paying directly for any and all costs that are associated with the particular project. Labor Hour Contracts are defined as a variation of the time-and-materials contract, differing only in that materials are not supplied by the contractor. See 12.207 (b), 16.601 (c), and 16.601 (d) for application and limitations, for time-and-materials contracts that also apply to labor-hour contracts. See 12.207 (b) for the use of labor-hour contracts for certain commercial services. Labor Hour Contracts do not include the cost of materials.

Indefinite Delivery Contracts

The government uses this type of contract when it does not know in advance exactly how much of a product or a service will be needed for a project. They will usually list a range and certain companies will be invited to provide their lowest bids on a per-item basis. 

This includes Task-Order Contracts which permit government stocks of specific items to be maintained at minimum levels and allow direct shipments to the users of products or services. They also permit great flexibility in both quantities and delivery scheduling and the ability of buyers to order supplies and services only after specific requirements for them materialize. Job-Order contracts, a competitively bid, fixed price, multi-year construction contract based on established or published unit prices via a unit price book (UPB) or a price list with a multiplier (termed coefficient) applied to the unit prices also fall under this category

Fixed-Price Contracts

These government contracts are used when the scope of work is clear from the beginning and therefore a price is determined by the agency in advance. There are many different types of this particular contract.

Firm Fixed-Price (FFP)

This contract means that the price is set in stone and the vendor or small business awarded the contract will be taking all the risk. So if the contract is over budget, the small business owner has to pay out of pocket. However, if the project is under budget, then the business will keep the extra profit. This is a great contract for companies that are precise with their pricing and a lot of experience in the field.

FFP Level-of-Effort

This government contract is defined by the level of effort the service provider will commit to the project, rather than results. It is a common contract used for things like research, which is often hard to define in advance.

FFP Materials Reimbursement

The small business provider will have a predetermined price for service and labor but is reimbursed for the cost of the materials at the end of the project. This contract is often used for repair services where at the beginning, the cost of materials may be unclear.

Fixed-Price with Award Fees

A fixed price with award fees contract offers a hard and fast price for objective performance success. This contract will also have additional awards to incentivize more subjective qualities like aesthetic appearance and technical knowledge

Fixed-Price with Economic Price Adjustment

The prices are often adjusted at the top of the project to account for changes within the cost of labor, materials, or market prices of specific items within the contract. The criteria for these sorts of price changes must be defined within the original contract.

Fixed Price Incentive (FPI)

This contract states a maximum price but it also awards the service provider for coming in under budget. So coming under budget in this type of contract allows for a larger profit for the small business provider.

Cost-Reimbursement Contracts

Cost-reimbursement is a category of contracts that are used when it would be too difficult to estimate the cost of the project in advance. They usually define a spending limit but are a much lower risk for the service provider than fixed-price contracts. 

Cost Contracts

This contract pays only for expenses and there is no profit for the small business provider. Cost contracts are often used for research projects provided by non-profit organizations.


This contract includes a limit for expenses that will be reimbursed along with a fixed payment for the service provider.


Like Fixed-Price-Incentive contracts, this provides a financial incentive for the service provider to come in under budget, while also covering project expenses.


This contract states that the govt client can pay the expenses of completing the project and also provides financial awards supported criteria outlined beforehand.

Cost Sharing

This type of contract only pays a predetermined portion of the overall costs. It is most common in research contracts where the service provider will benefit in other ways from the results of the research.