The different types of federal contracts are generally aligned with pricing. These different contract types are defined below using the Federal Acquisition Regulation (FAR) defining terms.
According to FAR, "A firm fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor's cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties."
As described in FAR, "Cost-reimbursement types of contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that a contractor may not exceed (except at its own risk) without the approval of the contracting officer.
From FAR: "Incentive contracts...are appropriate when a firm-fixed-price is not appropriate and the required supplies and services can be acquired at lower costs and, in certain instances, with improved delivery or technical performance, by relating the amount of profit or fee payable under the contract to the contractor's performance."
The FAR definition follows: "There are three different types of indefinite-delivery contracts: definite quantity contracts, requirements contracts, and indefinite quantity contracts. The appropriate type of indefinite-delivery contract may be used to acquire supplies and/or services when the exact times and/or exact quantities of future deliveries are not known at the time of contract award.
FAR definition: "A time-and-materials contract provides for acquiring supplies or services on the basis of -- (1) Direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit; and (2) Actual cost for materials (with some exceptions).
Labor-Hour and Letter Contracts
A labor-hour contract is a variation of the time-and-materials contract (see above), differing only in that materials are not suppllied by the contractor. A letter contract, according to FAR, is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services