Firm fixed price vs cost plus vs time and materials: which contract type is safest for a small sub?

For a small subcontractor, a firm fixed price (FFP) contract is generally safer than a cost-reimbursement (cost-plus) contract because it limits the subcontractor's exposure to unallowable costs and extensive auditing. A firm-fixed-price contract places the maximum risk on the contractor for all costs and profit or loss, but it also means the price is not subject to adjustment based on cost experience. This provides predictability for your bookkeeping and pricing.

Cost-reimbursement contracts, on the other hand, require the prime contractor, and by extension its subcontractors, to track and justify all incurred costs to ensure they are allowable according to the Federal Acquisition Regulation (FAR) Part 31, Contract Cost Principles and Procedures. This can involve significant additional accounting and administrative burden, as well as the risk of certain costs being deemed unallowable by the government, which would then not be reimbursed. The Defense Contract Audit Agency (DCAA) may audit these costs, and while the prime is ultimately responsible to the government, the burden of proof often flows down to the subcontractor. While a time-and-materials (T&M) contract is a type of cost-reimbursement contract, it has fixed hourly rates for labor, which includes wages, overhead, G&A, and profit, plus actual costs for materials (FAR 16.601(b) and (c)). This offers more cost predictability than a pure cost-plus arrangement, but still requires robust cost tracking for materials.

Marcus, a firm fixed price (FFP) contract is generally safer for a small subcontractor, but you still need to ensure your subcontract with the prime clearly defines your scope and payment terms. Federal prime contractors often use a time-and-materials (T&M) contract for services when they cannot estimate the extent or duration of the work with reasonable confidence. The fixed hourly rates on a T&M contract can provide more predictability than a pure cost-plus arrangement for your labor, but you will still need to track material costs diligently. Your prime will flow down the requirements from the federal contract, so understanding your responsibilities for cost tracking, invoicing, and potential audits is critical for either contract type.