The governmet likes to know what they will be paying for a good or service before they buy. This is why firm-fixed price contracts are favored. The responsibility for project completion lies on the contractor without regard to any risk they may/may not take in order to do so. When project circumstances are not so cut and dry, the following contracts and subtypes may be used.
Fixed-Price Contracts (Lump-Sum)
A ubiquitous contract type where the price you get paid upon completion of a milestone and/or project is a fixed amount, or “do not exceed”. You must complete all agreed work or you will not get paid, but if anything unexpected and unaccounted for happens during delivery phase you must pay out of pocket or lose big time.
This type of contract puts a lot of burden upon the contractor. Contractors with these common contracts must effectively estimate their costs in order for their price to be considered and to mitigate risk in order to turn a profit.
Cost-Reimbursement / Cost-Plus Contracts
These contracts are comparable to fixed-price, with an additional fee added since there is potential for requirements to change following the initial performance period. Cost-reimbursement contracts allow contractors to make a profit which ensures they are paid a negotiated amount independent of their costs.
Time-and-Materials
Comparable to hourly pay – this contract type comensates the contractor for actual time spent working in addition to any materials purchased. Considering the potential for these to be high-cost, the government tends not to award these contracts often. These are used sparsely when the government has no possible way to estimate the amount of time or effort it would take to complete requested work.
Indefinite Delivery / Indefinite Quantity Contracts (IDIQ)
A worthy goal for all government contractors. An IDIQ contract ends when (a) a predetermined amount has been spent on the project or (b) a predetermined amount of time has passed since project commencement. Generally IDIQ contracts could be given for 5 years or $10 million dollars, whichever is first.
When IDIQ contracts are awarded, the government usually has a project they’d like long term help with and the government agency gives a qualified contractor or a small pool of contractors exclusive mini-RFPs with low to no competition as-needed throughout its duration. These contracts are mostly long term and a great way to secure steady revenue. The low competition opportunity is sweet too!
In conclusion
These contracts are effectively that, binding agreements that the granting agencies will penalize you if breached. Only when you manage to get the game and do contracts that can be executed professionally will you win big as a contractor.