Government Contract Types Explained: FFP, T&M, CPFF, IDIQ, BPA

Federal contracts come in 5 major types, each with different risk profiles and pricing. Understand these and you understand how to price your bids, manage scope creep, and know if a $1M opportunity is actually worth pursuing. Most tech companies bid the same way for all contract types. Mistake. Here's the breakdown.

FFP: Firm Fixed Price

Definition: You quote one price. Government pays that price. You live with the costs.

Risk to you: HIGH. If scope creep happens, costs overrun, or your estimates were wrong, you eat it. 15-20% net margin is typical (you need buffer for overruns).

When used: Well-defined, stable scope. Development of a specific software feature. Implementation of a known system. Fixed-price contracts favor the government—they lock in cost.

Example: "Develop mobile app for agency with spec X, deliver by date Y." $250K FFP. If it takes 2000 hours instead of 1500, you lose money.

For tech companies: Good for products/services with known scope. Bad for R&D or anything experimental. Price 20-25% higher than you think to cover unknowns.

T&M: Time & Materials

Definition: You bill hourly rates + actual materials cost. Government pays for actual hours spent.

Risk to you: LOW. You're covered regardless of hours spent. Risk shifts to government.

Rates: Tech labor typically $150-$400/hour depending on skill level (junior dev $150, senior architect $300+). Materials at-cost or with markup.

When used: Uncertain scope. R&D. Maintenance & support. Anything where hours can't be predicted upfront.

Example: "Provide software engineering support at $250/hr + materials." Agency gets unlimited hours, you bill monthly for what's spent.

For tech companies: Premium pricing model. You get paid for all effort. Government controls scope (they can reduce hours if budget tightens, but you don't take a hit). Preferred if you know effort is uncertain.

CPFF: Cost Plus Fixed Fee

Definition: You bill all costs (labor, materials, overheads) + a fixed fee on top.

Risk to you: VERY LOW. You're reimbursed for costs, plus margin is guaranteed regardless of overruns.

Margin: Fixed fee is typically 4-8% of estimated costs. Example: $1M cost estimate + $60K fee ($60K = 6% fee) = $1.06M contract value.

When used: High uncertainty. Complex R&D. Government wants you to succeed, not just manage costs.

Example: "Conduct 18-month research program into quantum encryption. We'll reimburse your costs + $100K fixed fee."

For tech companies: Lowest risk but smallest margin. Only bid if you have cost certainty and trust your accounting. Government audits your costs.

IDIQ: Indefinite Delivery / Indefinite Quantity

Definition: Government commits to minimum spending ($X) but can buy up to $Y. You keep winning task orders over contract life (typically 5-10 years).

Risk to you: MEDIUM. You're guaranteed minimum revenue, but you must be responsive or lose follow-on task orders.

Value: Largest single contract type. Typical value $5M-$50M over contract life. Examples: IT services IDIQ (minimum $2M, max $10M), engineering support IDIQ, cloud services IDIQ.

When used: Agencies need ongoing services with variable monthly volume. Maintenance, support, engineering, consulting.

Example: "IT support IDIQ: minimum $1M/year, maximum $5M/year for 5 years. Agencies issue task orders for specific work against this contract."

For tech companies: Holy grail of federal contracting. Once you win IDIQ, revenue is predictable ($1M/year minimum) and expandable ($5M/year possible). Focus on winning 1-2 IDIQs in your market.

BPA: Blanket Purchase Agreement

Definition: Simplified IDIQ. Government and you agree on pricing/terms. Agencies issue purchase orders (POs) directly for products/services without additional negotiation.

Risk to you: LOW. Similar to GSA Schedule but for specific agency relationship.

When used: Repeat buys of the same product/service. Software licenses. Maintenance. Training.

Example: "We'll buy your cybersecurity training at $500/person, unlimited quantity over 2 years. Just issue POs for trainer & materials as needed."

For tech companies: Easy to execute. Lower barrier than IDIQ. Good stepping stone to IDIQ or GSA Schedule.

Comparison Table: Which Contract Type to Target?

Bidding Strategy by Contract Type

FFP: Price high (cost estimate × 1.2-1.25). Include buffer for unknowns. Use historical data to estimate hours/costs. Get fixed-price quotes from subcontractors.

T&M: Price competitive but realistic. Your rates are negotiable. Tech roles: senior dev $250-$350/hr, architect $300-$400/hr, PM $200-$300/hr. Ensure billable rates cover overhead (typically 40-60% overhead burden).

CPFF: Price actual costs + modest fee. You're not selling margin here, you're selling capability. Fee is typically 4-8%. Only bid if you have strong cost estimation.

IDIQ: Price base task rates competitively (you'll win on price AND responsiveness). Win minimum guaranteed year-1 revenue, then focus on technical excellence to win follow-on task orders.

BPA: Match GSA Schedule pricing or discount slightly. You're betting on volume. Lock in pricing for 2-3 years.

Getting Started

Know your contract type before bidding. Search SAM.gov for opportunities, check the "contract type" field. If it says FFP with unclear scope, don't bid low. If it's T&M with R&D, bid your best rates. If it's IDIQ, focus on minimum year-1 revenue and long-term value, not single task profitability.

Most tech companies treat all contracts the same. They don't. Your pricing strategy, risk acceptance, and bid quality should change based on contract type. Master this and you'll win 2-3x more contracts at better margins.