How does a 'firm fixed price' (FFP) contract differ from a 'cost-reimbursement' contract?

A firm fixed price (FFP) contract provides a price that is not subject to adjustment based on the contractor's costs, while a cost-reimbursement (cost-plus) contract pays for allowable incurred costs up to an estimated total cost. With FFP, the contractor assumes maximum risk and full responsibility for all costs and profit or loss (FAR 16.202-1). Cost-reimbursement contracts establish an estimated total cost as a ceiling that requires contracting officer approval to exceed (FAR 16.301-1).

FFP contracts are typically used when the requirements are well-defined and there is a low risk of unforeseen costs, such as for a specific tree trimming job. Cost-reimbursement contracts are used when uncertainties in contract performance do not permit costs to be estimated with sufficient accuracy to use a fixed-price contract, like a long-term base groundskeeping service where the scope might evolve. The government uses cost-reimbursement contracts when there is greater risk or uncertainty about the work involved.