Fixed Price vs. Cost Reimbursable vs. Time and Material Contracts

This article breaks down the differences between fixed price, cost reimbursable, and time and material contracts. Understanding these distinctions is crucial for project success, as the choice of contract significantly impacts risk allocation and cost predictability.

Fixed Price Contract

The fixed price contract is perhaps the most straightforward and commonly used type. In this arrangement, the buyer and seller agree on a single, fixed price for the entire scope of the project.

With a well-defined scope, the fixed price contract offers the buyer the least amount of cost risk. Once the price is agreed upon, the seller is responsible for managing costs within that budget.

Here are a few variations of fixed price contracts:

• Firm Fixed Price (FFP): As described above, a single, agreed-upon price.
• Fixed Price Plus Incentive Fee (FPIF): A fixed price with potential bonuses for meeting or exceeding specific goals.

Cost Reimbursable Contract

In a cost reimbursable contract, the buyer reimburses the seller for their allowable costs incurred during the project, plus an additional fee to cover profit. This type of contract shifts most of the cost risk to the buyer, as the total project costs are not known upfront.

Cost reimbursable contracts are often used when the buyer has a very specific need and provides detailed specifications. The seller then creates a comprehensive Statement of Work (SoW) based on those requirements.

Types of cost reimbursable contracts include:

• Cost Reimbursable (CR): As described above, covering costs plus a fee.
• Cost Plus Fixed Fee (CPFF): Costs are reimbursed, and the seller receives a fixed fee.
• Cost Plus Award Fee (CPAF): Costs are reimbursed, and the seller can earn an award fee based on performance.
• Cost Plus Incentive Fee (CPIF): Costs are reimbursed, and the seller receives an incentive fee based on achieving certain targets.

Time and Material Contract

The time and material (T&M) contract is typically used for smaller projects or when the scope of work is difficult to define precisely. The contract price is based on an hourly rate or per-item basis.

T&M contracts blend aspects of both fixed price and cost reimbursable contracts. The buyer faces a moderate level of cost risk compared to CR and FP contracts.

Key Differences Summarized

The following table highlights the major differences between these three contract types: