TL;DR. Contract type decides who eats overruns: the contractor on fixed-price, the government on cost-plus-fixed-fee (CPFF). Since April 2026, fixed-price is the official default, but a firm price on unbuilt tech is a guess wearing a signature block.
- New to this? Fixed-price fits clear scope and predictable costs. CPFF fits immature tech and fuzzy requirements.
- Contractor PM on fixed-price? Control costs, track burn closely, and take no new scope without a mod.
- Contractor PM on cost-plus? Keep timecards clean and give DCAA quick access. Your fee is fixed in dollars, so overruns shrink your margin.
- Government PM? Don't force fixed-price where it doesn't fit, but know that a DoD cost-type deal over $100 million now needs agency-head-level approval, unless an exception like major-system R&D applies. On cost-plus, run EVM and require DCAA-compliant accounting.
Every contract you work on has a type. That type determines who absorbs cost risk, how your fee is calculated, and what the government will scrutinize. If you don't know which type you're on and why, that's the first thing to fix.
The choice between cost-plus and fixed-price isn't paperwork. It's a decision about who takes the risk if things go sideways. The government now has a formal preference for fixed-price: Executive Order 14402, signed 30 April 2026, makes it the default and preferred contract type. It's not arbitrary. It's about shifting financial exposure to the contractor and creating an incentive to manage costs. But that preference has limits. When nobody knows what something will cost because nobody's built it before, forcing a firm price doesn't reduce risk. It just hides it until the program blows up.
Here's what you need to know about each type, when they're used, and what they mean for you in practice.
The core difference: who absorbs cost risk
Fixed-Price (FFP): You agree to deliver a defined product or service for a specific price. The government pays that price. If your costs run over, you eat the difference. If you come in under, you keep the savings. The government knows exactly what it's spending. You have every incentive to run lean.
Cost-Plus-Fixed-Fee (CPFF): The government reimburses your actual allowable costs, plus pays you a pre-negotiated fixed fee (your profit). That fee doesn't change whether you come in over or under. The government bears the cost risk. You have less financial pressure to cut costs, which is fine when nobody can accurately estimate them anyway.
Everything else follows from this. The oversight requirements, the audit exposure, the accounting system requirements, the modification process: all of it flows from who's holding the risk.
When fixed-price is the right call
FFP works when the scope is clear enough to price. If you know what you want, when you want it, and you have enough market data to know what it should cost, fixed price gives you the best value. The contractor has skin in the game. Efficiency is rewarded directly.
This is the default for production runs, sustainment, and services with well-defined performance metrics. Recurring support contracts, logistics, staffing augmentation: if you've done it before and you know what it costs, FFP is the answer.
The road to that preference hasn't been a straight line. Congress wrote a fixed-price preference into DoD rules in the FY2017 NDAA, repealed it in the FY2022 NDAA (DoD dropped the rule in October 2022), and then limited fixed-price development deals on major programs after big losses. In 2026 the pendulum swung back: EO 14402 requires the contracting officer to justify any non-fixed-price contract in writing, and DoD deals over $100 million also need agency-head approval, with exceptions such as major-system R&D. The pressure to transition from cost-plus to fixed-price as programs mature is real. If you're on a CPFF development contract, your PM is already thinking about when to make that transition.
When cost-plus is the right call
CPFF exists for a reason. When you're developing technology nobody has built before, writing a firm price is fiction. You're not actually reducing risk. You're just making the contractor guess and then pad the estimate to survive. The government ends up paying more through scope creep, modifications, and eventual restructuring than it would have paid for a well-managed cost-plus contract.
CPFF is appropriate when:
- Requirements are truly undefined: early-stage design, software where user feedback shapes scope, systems integration where nobody knows what the interdependencies will cost
- Technology isn't mature: if TRL is below 6, you probably can't price it reliably
- The government needs flexibility to pivot: R&D programs where the right answer isn't known at contract award
- There's urgency: sometimes getting the right contractor moving fast matters more than achieving perfect pricing
The tradeoff: cost-plus means more oversight, more accounting scrutiny, and DCAA in your books. That's not a punishment, it's the deal. The government took on your cost risk. They get to verify the costs.
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The contract types side by side
| Contract Type | Who Bears Cost Risk | Use When | Contractor's Deal |
|---|---|---|---|
| FFP: Firm Fixed Price | Contractor | Well-defined scope, mature tech, predictable costs | Full profit if efficient. Full loss if you estimated wrong. |
| FPIF: Fixed-Price Incentive (Firm Target) | Shared up to ceiling | Moderate risk, want to incentivize efficiency | Share in savings if you come in under target cost |
| CPFF: Cost Plus Fixed Fee | Government | High tech risk, R&D, unclear requirements | Fixed fee regardless of cost. Low upside, low downside. DCAA is your shadow. |
| CPIF: Cost Plus Incentive Fee | Shared via share ratio | High risk with measurable performance outcomes | More fee if you hit targets. Less if you miss. |
| T&M: Time & Materials | Mostly government | Uncertain labor hours, services without defined scope | Billed at fixed hourly rates. Every T&M contract has a ceiling price. |
What this means for contractor PMs specifically
If you're a contractor PM on a fixed-price contract, your job is cost control. Every dollar over your internal estimate comes out of your fee. You have zero incentive to accept scope without a mod. You have every incentive to buy materials efficiently, staff to the right level, and track burn rate daily. A PM who doesn't know their task order ceiling and current obligations is flying blind.
If you're on a cost-plus contract, your job is compliance and performance. Your fee is fixed. You don't gain from cutting corners. What you do gain from is a strong CPARS rating and a reputation for clean cost accounting. DCAA has the right to your books under FAR 52.215-2. Don't be slow with access. Don't be sloppy with timecards. The contractors who build good DCAA relationships treat it like any professional review: open, transparent, documented.
One more thing: your fixed fee is a dollar amount, not a percentage. If your program runs 30% over cost estimate, your fee as a percentage of total cost just dropped. Understand your economics before you sign.
What this means for government PMs
The pressure to use fixed-price is real, and since EO 14402 it's written policy. But don't force it when it doesn't fit; the order still allows other types when you can justify them. A CPFF contract that's well-managed and realistically scoped will cost less than an FFP contract that gets modified 15 times because nobody could define requirements at award.
If you're on a cost-plus program: implement EVM, run structured technical reviews, and demand that the contractor's accounting system is DCAA-compliant before you start invoicing. These aren't optional when the government is holding the cost risk.
If you're targeting a transition to fixed-price: requirements need to be mature, costs need to be estimable, and you need a contractor who's actually built a version of this before. Rushing the transition to hit a policy metric is how programs end up with underbid fixed-price contracts and years of restructuring.
Module: Defense Contracting Fundamentals
Contract types, risk structures, IDIQs, GWACs, modifications, and the COR relationship, covered in plain English with practical examples for both government and contractor PMs.
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