When is a firm fixed price contract appropriate versus a time-and-materials contract?

A federal contracting officer chooses between a firm-fixed-price (FFP) contract and a time-and-materials (T&M) contract based on the risk associated with defining requirements and estimating costs, as outlined in FAR Part 16.

An FFP contract is appropriate when the requirements are well-defined, and the contractor can bear maximum risk for costs and profit or loss. This type of contract sets a price not subject to adjustment based on the contractor's cost experience (FAR 16.202-1). For your IT services, even with a clear performance work statement, the wide variation in pricing from your sources sought suggests a lack of confidence in cost estimation across the market. This can make an FFP contract riskier for both the government and the contractor, potentially leading to higher bids or performance issues if the contractor misjudges costs.

A T&M contract is used when it is not possible to estimate the extent or duration of the work with reasonable confidence (FAR 16.601(c)). It pays direct labor hours at fixed hourly rates plus actual material costs (FAR 16.601(b)). While your PWS is clear, if there's still high uncertainty about the effort needed due to potential shifts in IT requirements, a T&M contract might allow for more flexibility. However, the government assumes more cost risk with a T&M contract, so the contracting officer must justify its use.