Government contracts are not one-size-fits-all. Agencies use different contract structures depending on the project, budget, and level of risk. For small businesses, understanding the most common contract types is essential before bidding. Each type has specific rules for pricing, performance, and payment, which directly affect cash flow and profitability.
Fixed-Price Contracts
In a fixed-price contract, the payment amount is set in advance. The contractor delivers the agreed product or service at the specified price regardless of actual costs.
- Advantages: Predictable revenue and clear expectations.
- Considerations: Cost overruns reduce profitability since the contractor absorbs extra expenses. Careful pricing and strong cost control are important.
Cost-Reimbursement Contracts
With this type, the government reimburses the contractor for allowable costs and pays an additional fee for profit. These contracts are often used when projects are complex and costs are hard to estimate.
- Advantages: Reduced financial risk since the government covers allowable expenses.
- Considerations: Requires detailed recordkeeping, accounting systems, and compliance with the Federal Acquisition Regulation.
Time-and-Materials Contracts
Time-and-materials contracts pay contractors based on the hours worked and the materials used. Agencies use this type when the project scope is not clearly defined at the start.
- Advantages: Flexibility when requirements change during the project.
- Considerations: Contractors must monitor labor rates and materials closely to avoid disputes.
Indefinite Delivery Indefinite Quantity (IDIQ) Contracts
IDIQ contracts allow agencies to order goods or services over a set period without a fixed quantity at the start. Contractors agree to deliver when orders are placed.
- Advantages: Potential for repeat work and steady business over time.
- Considerations: Actual revenue depends on the number and size of orders received.
Blanket Purchase Agreements (BPAs)
BPAs are simplified agreements used for recurring purchases. Agencies establish terms with a contractor, and individual orders are placed as needed.
- Advantages: Streamlined process for agencies and contractors.
- Considerations: Contractors must be ready to fulfill multiple small orders on short notice.
Subcontracts
Not all small businesses work directly with the government. Many start as subcontractors under larger prime contractors. Subcontracts allow small businesses to build experience and past performance history without handling the full compliance burden.
- Advantages: Entry point into government contracting with reduced administrative responsibility.
- Considerations: Payment terms and requirements are set by the prime contractor, not the government.
Final Note
Knowing the different types of government contracts helps small businesses prepare realistic bids, manage compliance, and anticipate cash flow needs. Each contract type has unique risks and benefits, but all require careful planning.
GillmanBagley supports contractors across industries by providing funding solutions that cover payroll, materials, and other expenses while waiting on government payments. Our programs are structured to give businesses the liquidity they need to perform successfully under any contract type.