What are the key differences between firm-fixed-price and cost-reimbursement contracts?

Firm-fixed-price and cost-reimbursement contracts differ primarily in how risk is allocated and how payments are structured. A firm-fixed-price (FFP) contract places the maximum risk and responsibility for all costs and resulting profit or loss on the contractor, as the price is not subject to adjustment based on the contractor's cost experience (FAR 16.202-1). The contractor receives a set price regardless of actual costs incurred.

Conversely, cost-reimbursement contracts provide for payment of allowable incurred costs up to an estimated total cost, which acts as a ceiling that the contractor cannot exceed without the contracting officer's approval (FAR 16.301-1). This structure shifts more cost risk to the government. For contractors, managing costs within the fixed price is critical for profitability on FFP contracts, while on cost-reimbursement contracts, careful tracking and justification of allowable costs are essential for payment.