Understanding Federal Cost Reimbursement Contract Types

Federal government contract types come in various forms. One of the most complex types is the cost-reimbursement contract.

Federal courts have imposed False Claims Act liability for underbidding in cost-reimbursable contracts. United States ex rel. Loughren v. Unum Group, 613 F.3d 300, 310 (1st Cir. 2010).

This kind of arrangement is somewhat different than the standard firm-fixed-price contract where bidders offer a flat price for their product or service.

A cost reimbursement contract, on the other hand, occurs when the contracting parties are not quite sure about the cost of services. 

In cost reimbursement projects, the government assumes some level of risk of the final contract price. However, as in all government contracts, pricing must be reasonable.

• Contractors may not exceed the target price without first consulting with the contracting officer.
• At the initial stages of the contract, negotiation of allowable costs is critical. 
• The contracting officer does have some leeway to negotiate but is also bound the basic cost accounting standards (CAS).

When Does the Government Use Cost Reimbursement Contracts?

Government contracting agencies should use cost reimbursable contracts when the requirements are not defined to the extent that a fixed-price contract is not feasible. The contracting officer must document the source selection record to justify her reasons for using a cost-reimbursable contract. See additional FAR Provisions.

In a cost-reimbursable contract, both the government and the contract set target costs. This way a contractor has some level expectation when performing the contract.

What are the Various Federal Cost Reimbursement Contract Types? 

In federal contracting businesses will encounter the following cost reimbursement contract types of procurement vehicles otherwise known as cost plus contracts. They are:

• Cost plus fixed fee
• Cost plus incentive fee
• Cost plus award fee

Cost plus fixed fee (CPFF) contract: This contract type of government contract has cost reimbursable terms where the agency reimburses the contractor for the government’s allowable costs. These allowable costs are spelled out in the contract terms. The contract also allows for a fixed amount of profit.

Cost plus Incentive Fee Government Contracts: This type of government procurement has terms where the contracting agency reimburses the contractor for the allowable costs defined within the contract terms. The incentive payment arises when the contract meets specified performance objectives.

Cost plus contract – award fee (CPAF). 

The government uses this type of cost reimbursable contract when the government pays the contractor’s allowable cost, but a substantial amount of the payment focuses on set criteria and expectations for the contractor’s performance.

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