Updated November 2026 · VG CPA PC advisors
Fixed-price contracts
Under a firm-fixed-price contract, you are paid a set price regardless of your actual costs. You keep savings and bear overruns. Accounting system requirements are lighter, and incurred cost submissions are not required for pure fixed-price work.
Pricing still matters: proposals over certain thresholds may require certified cost or pricing data, and estimates should be built from realistic rates.
Cost-reimbursable contracts
Cost-plus-fixed-fee and similar contracts reimburse allowable costs plus a fee. The contractor needs an adequate accounting system, must exclude unallowable costs and must file annual incurred cost submissions. Fees are limited by regulation, generally to 10% of estimated cost for most work and 15% for research and development.
These contracts reduce cost risk for the contractor but bring the most audit scrutiny.
Time-and-materials and labor-hour
T&M contracts pay fixed hourly rates for labor categories plus materials at cost. Hourly rates include indirect costs and profit, so your wrap rate determines margin. Contractors must verify that employees meet labor category qualifications and that hours billed are supported by timekeeping.
Because the government bears more risk, T&M contracts carry ceiling prices and require surveillance and records similar to cost-type work.