TL;DR. Fixed-price puts cost risk on the contractor. Under Cost-Plus-Fixed-Fee (CPFF), the government reimburses allowable costs and pays a set dollar fee, so brilliant work earns the same fee as average work, plus a warm feeling.
- New to this? Since Executive Order 14402 (April 2026), fixed-price is the default and preferred type. CPFF is for work too uncertain to price or to build good incentives around.
- Government PM? Justify why other types don't fit, plan an off-ramp to a more defined type, and watch costs closely. Above $100 million, a non-fixed-price DoD contract now needs agency-head-level approval.
- Contractor? Bid CPFF selectively, price your fee for risk and admin load, and keep DCAA-compliant accounting.
- Already on CPFF? Show steady progress and careful use of funds. That earns the next award.
The Fundamental Divide: Risk and Reward
At its core, the choice between fixed-price and cost-plus contracts boils down to who bears the financial risk and how profit is structured. This isn't an academic exercise; it has massive implications for project execution, cost control, and contractor accountability.
Fixed-Price Contracts (e.g., Firm-Fixed-Price, or FFP): Under a fixed-price contract, the government pays a set price for a defined product or service, regardless of the contractor's actual costs. The contractor assumes the full risk of cost overruns or underruns. If they come in under budget, they keep the difference; if they go over, they absorb the loss. This provides maximum incentive for the contractor to perform efficiently and control costs.
Cost-Plus Contracts (e.g., Cost-Plus-Fixed-Fee or CPFF, Cost-Plus-Incentive-Fee or CPIF, Cost-Plus-Award-Fee or CPAF): With cost-plus contracts, the government reimburses the contractor for all allowable costs incurred, plus an agreed-upon fee or profit. Here, the government generally bears the risk of cost overruns. While there are variations designed to incentivize performance (like CPIF or CPAF), the fundamental premise is that the government is paying for the effort, not just the outcome at a set price.
The specific type we often discuss in the context of high risk is the Cost-Plus-Fixed-Fee (CPFF) contract. Under CPFF, the contractor is reimbursed for all allowable costs, but their fee (profit) is a fixed dollar amount negotiated at the outset. This fee does not change, regardless of whether the actual costs are higher or lower than initially estimated. It offers the government some predictability on the profit margin while still accepting the cost risk.
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Why the Government Cares So Much: The Policy Imperative
DoD's stance on fixed-price has swung back and forth over the past decade, and in 2026 it swung hard toward fixed-price. Here's the actual record:
- No cost-type production on major programs (FY2013 NDAA, section 811): DoD may not use cost-reimbursement line items to buy production on major defense acquisition programs, except in narrow cases (DFARS 216.102).
- A preference, then a repeal (FY2017 and FY2022 NDAAs): Section 829 of the FY2017 NDAA told DoD to prefer fixed-price contracts, and a 2019 DFARS rule required head-of-contracting-activity approval for certain cost-type contracts over $25 million. Section 817 of the FY2022 NDAA repealed that preference, and DoD removed the rule on 28 October 2022.
- A brake on fixed-price development (FY2023 NDAA, section 808): After heavy losses on fixed-price development deals (Boeing had absorbed about $7 billion in overruns on the KC-46 tanker by early 2024), Congress limited major programs that use a fixed-price contract covering development to buying no more than one low-rate initial production lot under it (DFARS case 2023-D009).
- Fixed-price becomes the default (Executive Order 14402, 30 April 2026): The order makes fixed-price contracts, including fixed-price incentive and performance-based structures, the default. At the Department of War, a cost-reimbursement, time-and-materials or labor-hour contract above $100 million needs a written justification approved by the agency head, who may delegate only to a non-career official. Agencies also had 90 days to review their 10 largest non-fixed-price contracts. The FAR Council's overhauled FAR Part 16 text, posted 1 July 2026, now says fixed-price types "are the default and preferred contract types" (FAR 16.102(b)).
So What? For PMs, the bar for any cost-reimbursement contract, especially CPFF, is now high. Above $100 million you need a written justification approved at the agency-head level, and below that you should still expect hard questions. For contractors, expect the government to push cost risk your way wherever the work allows it. Strategic bidding and demonstrating value beyond just incurring costs matter more than ever.
DoD obligated about $445 billion on contracts in fiscal 2024, more than all other federal agencies combined (Congressional Research Service). Even small percentage shifts in contract type move a lot of money, which is why this choice matters so much.
When Cost-Plus Finds Its Niche: Embracing Uncertainty
Despite the strong push for fixed-price, cost-plus contracts, particularly CPFF, retain a vital, albeit specialized, role. They are reserved for situations where the government explicitly acknowledges and accepts high technical or programmatic risk. In essence, cost-plus is for when you're buying an approach to a problem, not a fully defined solution.
CPFF is typically justified in scenarios where defining meaningful incentives (as in CPIF or CPAF) is impractical due to extreme uncertainty. Among cost-reimbursement types, it's usually the fallback when incentives won't work:
- High Technical Uncertainty / Early R&D: This is the primary justification. For truly cutting-edge technologies (e.g., advanced AI/ML for autonomous systems, quantum computing applications, novel directed energy weapons) where the technical path is still evolving and requirements are fluid, CPFF allows the government to fund exploration without committing to a fixed outcome. Think early research projects where the goal is discovery.
- Scope Indefiniteness: When it's truly impossible to precisely define the Statement of Work (SOW) or performance specifications at the outset. A rapid prototyping effort for a new sensor suite, where exact integration challenges will only become clear through iterative testing, is a good example.
- Lack of Historical Data: For entirely new systems or services, there might be no reliable basis for estimating costs or setting meaningful performance incentives.
- Government Oversight and Control: CPFF typically involves significant government oversight. When the government needs to maintain a high degree of control over the contractor's efforts due to the critical nature or novelty of the work, CPFF can be suitable.
So What? For PMs, if you're considering CPFF, ensure your justification clearly articulates why other contract types (FFP, FPIF, CPIF, CPAF) are truly unsuitable. For contractors, recognize that winning these contracts means embracing high risk on the technical side, but with the assurance of cost reimbursement. Your reputation will hinge on demonstrating progress and efficient use of funds.
Comparing the Choices: A Quick Reference
To illustrate the distinctions, here's a comparison of common contract types:
| Contract Type | Primary Risk Bearer | Cost Certainty (Govt) | Profit Structure | Ideal Situation |
|---|---|---|---|---|
| Firm-Fixed-Price (FFP) | Contractor | High | Fixed price; profit tied to cost efficiency | Well-defined requirements, mature technology, predictable costs. |
| Cost-Plus-Fixed-Fee (CPFF) | Government (for costs) / Contractor (for fee erosion) | Low (costs); High (fee) | Fixed dollar fee, regardless of actual costs | High technical uncertainty, undefined scope, early R&D where incentives are impractical. |
| Cost-Plus Incentive Fee (CPIF) | Shared | Moderate to Low | Adjustable fee based on performance against cost/schedule/technical targets | Moderate to high uncertainty, where performance incentives can be meaningfully defined. |
| Cost-Plus Award Fee (CPAF) | Government | Low | Adjustable fee based on subjective evaluation of performance | High uncertainty, where objective incentives are difficult but government wants to reward excellence. |
Navigating the Choice: Practical Implications
The contract type choice impacts how both sides operate daily.
For Defense Program Managers (PMs)
- Enhanced Justification: Your justification for CPFF must be exceptionally strong, clearly articulating why other, more controlled types are unworkable. Above $100 million, it also needs agency-head-level approval under EO 14402. Include a detailed risk assessment and a clear transition strategy to a more defined contract type as maturity increases.
- Rigorous Oversight: Expect increased scrutiny from contracting officers, auditors (DCAA), and higher headquarters. Put solid cost surveillance, technical progress monitoring, and regular reviews in place.
- Defining the "Fixed Fee": Negotiating a fair and reasonable fixed fee requires strong market research and a clear understanding of the contractor's proposed effort, even in uncertain environments.
- Transition Planning: Every CPFF contract should ideally have a clear "off-ramp" or transition plan to a more definitive contract type (e.g., FPIF, FFP, CPIF) as technical risks are retired and requirements solidify.
For Defense Contractors
- Strategic Bidding: Be highly selective in bidding CPFF contracts. While it offers cost reimbursement, the fixed fee provides no upside for exceptional performance or cost savings. Carefully price the fee to ensure adequate profit given the inherent risks and administrative burden.
- Solid Cost Accounting Systems: You need strong, DCAA-compliant cost accounting systems to track and justify all allowable costs. Inadequate systems will lead to disallowed costs and payment delays.
- Demonstrating Value: Beyond simply incurring costs, actively demonstrate technical progress, problem-solving, and efficient use of resources to maintain government confidence and secure future work.
- Internal R&D Investment: For projects that might eventually transition to fixed-price, strong internal R&D capabilities allow you to mature technologies and reduce risks on your own dime, making you more competitive for later-stage, fixed-price awards.
- Negotiating Fair Fees: With heightened scrutiny, come to the table with strong justifications for your proposed fixed fee, linking it to the complexity, risk, and expected effort.
Module: Defense Contracting Fundamentals
This post touches on concepts covered in depth in the Defense Contracting Fundamentals module. Contract types, source selection, IDIQs, GWACs, modifications, and the COR role.
Start This Module Free →Outlook for 2026 and Beyond
The Cost-Plus-Fixed-Fee contract type isn't going away. The FAR still offers it, and EO 14402 allows non-fixed-price contracts when they're justified. But with fixed-price now the stated default, expect CPFF to be concentrated in the hardest cases: early-stage research and development, disruptive technology prototyping, and highly specialized efforts where defining precise requirements or performance incentives is truly impossible.
The 2026 "fixed-price first" policy means that CPFF will likely be treated as a fallback among the cost-reimbursement types, reserved for situations where the government is willing to accept almost all cost risk in exchange for exploring groundbreaking capabilities. PMs and contractors alike must be prepared for a rigorous justification process, meticulous oversight, and a clear strategy for transitioning these high-risk endeavors into more mature, cost-controlled programs. The enduring niche for CPFF will be at the very bleeding edge of defense innovation.
Contract Type Selection Summary
| Contract Type | Risk Allocation | Best Used When | Contractor Upside/Downside |
|---|---|---|---|
| Firm Fixed Price (FFP) | All on contractor | Well-defined scope; low technical risk | Full profit if efficient; loss if over budget |
| Fixed Price Incentive (FPIF) | Shared up to ceiling | Moderate risk; want to incentivize efficiency | Earn more if under target cost |
| Cost Plus Fixed Fee (CPFF) | All on government | High tech risk; R&D; requirements unclear | Low profit; no downside; DCAA oversight |
| Cost Plus Incentive Fee (CPIF) | Shared via share ratio | High risk with measurable outcomes | Earn more fee for better performance |
| Time & Materials (T&M) | Mostly on government | Uncertain hours; labor-intensive services | Billed at fixed hourly rates; the ceiling price is the max |