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Hey everyone, welcome back to FAR &
DFARS: Procurement Power!

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I'm Eric Marquette,
here with my co-host Paul Netopski.

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Today we're talking about something that
can either make or break your

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procurement-the contract type you choose.

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Now, we throw around terms like
"fixed-price," "cost-reimbursement,"

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"time-and-materials," but I think a lot
of folks still get stuck on what

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they really mean in practice,
or why they matter.

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So let's break down the big ones first.

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Paul, want to jump in and give us the
high-level categories?

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Sure,

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Eric.

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There are really four primary contract
types when you're working in federal

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procurement: fixed-price,
cost-reimbursement,

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time-and-materials,
and incentive-based contracts.

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Each one has its own risk profile,

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both for the contractor and for the
government.

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For example,
with a firm-fixed-price contract,

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the risk is almost entirely on the
contractor-they agree to deliver a

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product or service at a set price,

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no matter what hiccups occur.

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The government just has to pay on
delivery,

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which keeps their risk pretty low.

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Right,

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and on the flip side, cost-reimbursement
contracts are kind of the opposite.

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The contractor agrees to use "best
efforts," which usually means delivering

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to the best of their ability within the
estimated cost,

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but it's the government who takes on most
of the risk if things go off

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the rails-let's say, unexpected issues or
tech hurdles pop up during the

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project.

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I always mix this up, but it's like the
difference between saying "I'll

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try my best to finish the marathon,"
versus "I absolutely guarantee I'll

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cross the finish line no matter what."
That's a terrible analogy,

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but you get what I mean.

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Ha-no,

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that works.

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And then there are time-and-materials
contracts,

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which split the difference a bit.

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The government pays for actual labor
hours and materials used.

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It's often used when you can't pin down
the exact scope up front,

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but you still need to move quickly-like
for a rapid-response need where

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you don't have time to sit down and
estimate every detail.

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Yeah,

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I remember covering a project like that
early in my career-a time-and-materials

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deal for an urgent IT deployment.

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We had no real way to know how many hours
we'd need,

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but the government needed something in
place yesterday.

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So, speed over certainty, and all that.

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But then you start seeing options like
incentive-based contracts,

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too, right?

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Exactly.

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Incentive contracts-like fixed-price
incentive fee or cost-plus-incentive

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fee-are built to motivate better
performance.

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Bonuses for coming in under target cost,

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or for hitting higher quality benchmarks.

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It's meant to push contractors to focus
on both efficiency and quality,

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with the contract structure reflecting
that goal.

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But the risk and reward levels get more
complex as you move from fixed-price

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to cost-plus,
then to these hybrid incentives.

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And each contract type not

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only shifts the risk, it actually changes
the day-to-day process.

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Like, who's sending in reports,

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when payments hit the bank,
how much oversight you're putting up with.

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I mean, we're talking max government
admin on cost-reimbursement versus

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way less hassle on firm-fixed-price.

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It's a real tradeoff depending on your
project and your risk tolerance.

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That's

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right.

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The contract type you choose will dictate
things like cash flow,

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reporting, and how you allocate resources,

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which sets the stage for how the whole
project unfolds.

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Understanding these differences is
crucial if you want successful

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outcomes-and

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it's a point that just keeps coming up,

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episode after episode.

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Let's dig into why certain contract types
get picked

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over others.

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I mean, it's not random, right?

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FAR 16.

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104 actually spells out a bunch of
factors.

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We're talking price competition,

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project complexity,
how urgent the requirement is,

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or even the technical capabilities of the
contractor.

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Paul, you probably see these decisions
playing out firsthand all the

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time, especially in defense work?

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Absolutely.

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The selection is rarely arbitrary.

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Think of project complexity-if the
requirements are crystal clear and

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you've got solid market data,
fixed-price is the default.

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In fact, commercial contracts under FAR
Part 12 basically have to be

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firm-fixed-price,
unless you can justify otherwise.

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The risk's low for the government,

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and acquisition can move fast.

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But if the requirements are shifting,

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like in early R&D or when the technical
landscape is uncertain,

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you need more flexibility.

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That's where cost-reimbursement and
sometimes incentive contracts come

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in.

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See, that's interesting, because folks
always ask "Why can't we just

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use fixed-price for everything?" But the
reality is,

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if you don't know what you're going to
build or how long it'll take,

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locking in a firm fixed-price is,

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uh, sort of pointless-and super risky for
the contractor.

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They could get underwater fast.

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Exactly.

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Policies really shape this.

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Under DFARS, cost-reimbursement contracts
have a lot of limitations,

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especially for major defense acquisition
programs-they're pretty much

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banned for production unless you're in an
exception case.

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And for construction, the government
isn't allowed to use cost-plus types

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at all.

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So, sometimes there just isn't a
choice-the rules pick for you.

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That's

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a good point.

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And then there are incentive contracts,

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which can do a nice job of keeping
everyone honest on both price and

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performance.

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You had a story about this from your
defense contracting days,

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right?

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Yeah, one program stands out.

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We had an incentive fee structure-so
there was a target cost set by the

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government, and we could earn more profit
if we delivered ahead of schedule

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or with better quality.

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It really motivated the whole team.

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There's almost a competitive element: as
costs went down,

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profit went up; but if we missed the
targets,

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our potential fee dropped.

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It wasn't purely about money, either.

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There was a reputational
element-delivering early gets you

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recognized,

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better odds of follow-on business.

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So it's about more than just a financial
calculus.

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I see incentive contracts as a way for
the government to nudge industry

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into behaviors it values-and only when
those behaviors are actually possible

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given the uncertainty in the contract.

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Yeah,

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that makes sense.

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And negotiation is baked into the process.

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Negotiating contract type and price
happen at the same time.

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According to FAR 16.

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103, the aim is to land on a mix that
gives the contractor

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a real incentive for efficiency,

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but keeps government risk under control.

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The details aren't always black and
white; it's about matching the situation,

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the urgency, the unknowns,
and coming up with something that actually

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works in the real world.

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I think that's why acquisition planning
takes

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so long.

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The rationale for your contract choice
has to be defensible-you need

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documentation about why the contract type
fits,

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what risks exist, and how the selection
supports mission need.

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That's not just bureaucratic red tape-it
really does influence how the

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project performs and, honestly,

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whether it's set up for success or for
drama from day one.

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So speaking

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of drama, let's get into how contract
type impacts speed and compliance.

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Because, when you need to move fast-like
really fast-some contract types

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are clearly easier to manage than others.

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In my experience,
firm-fixed-price-especially the plain old

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FFP-tends

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to be a favorite because it's so much
simpler to administer.

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You just don't have to jump through as
many bureaucratic hoops compared

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to something like cost-reimbursement,

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where you need ongoing oversight and a
mountain of documentation at every

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stage.

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Yeah, in terms of procurement velocity,

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firm-fixed-price and sometimes
time-and-materials contracts will almost

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always beat the cost-reimbursement forms.

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FFP means you budget to a negotiated
number-that's it.

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Less audit, fewer mandatory flowdowns,

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and faster award.

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That's why for urgent needs, or
commercial services under certain

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conditions,

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agencies will lean into these contract
types.

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Cost-reimbursement, on the other hand,

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comes with max government administration
and slower payments-cash flow

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only as costs are incurred,
not on delivery.

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Right,

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I remember a case-well, one of those
fire-drill scenarios-where the government

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absolutely needed rapid response.

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They opted for a contract with fewer
embedded FAR and DFARS clauses to

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move things along fast.

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The tradeoff, of course, is increased
risk-because with fewer compliance

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touchpoints, you might miss something
that could come back to bite you

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later.

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But sometimes you don't have the luxury
of a perfect process when time's

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ticking.

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That's a real tension in contracting.

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You want agility and speed,
but there's always a compliance baseline.

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FAR and DFARS set minimums, especially
around cybersecurity and reporting,

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but firm-fixed-price contracts-and even
time-and-materials,

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within limits-do generally have less
admin overhead.

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That was something we discussed a few
episodes ago too-the balance of

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meeting mission needs but not letting
perfect compliance stall urgent

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work.

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And sometimes, to meet the mission,

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risk has to be managed-not just avoided.

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Totally.

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So, whether you're chasing speed or
aiming for watertight compliance,

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the contract type you pick is a big part
of how you get there-or whether

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you ever get there at all.

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And that's why, like Paul said,

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picking and documenting your decision
isn't just red tape-it's what sets

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the ground rules for the whole project.

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Alright, I think that covers it for
today's deep dive on choosing the

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right procurement path.

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We've got a lot more to unpack in future
episodes,

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but we'll leave it here for now.

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Thanks for joining me, Paul!

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Thanks,

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Eric.

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Always great insights and a solid
conversation.

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Looking forward to our next episode-till
then,

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take care everyone.

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Alright, everybody,

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see you next time on FAR & DFARS:
Procurement Power!