Contract Types: Legal Overview

Contract Types: Legal Overview
Kate M. Manuel
Legislative Attorney
December 29, 2014
Congressional Research Service
7-5700
www.crs.gov
R41168

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Contract Types: Legal Overview

Summary
Federal procurement contracts are commonly divided into two main types—fixed-price and cost-
reimbursement—that primarily differ as to whether the government or the contractor assumes the
risk of increases in the costs of performance (e.g., wages, materials). With a fixed-price contract,
the contractor assumes this risk by agreeing to provide supplies or services to the government for
a specified price established at the time of contracting. If the costs of performance exceed this
price, the contractor generally cannot, absent some provision for price adjustment in the contract,
recover more money from the government. Rather, it must perform the contract at a loss, or
default on the contract. In contrast, with a cost-reimbursement contract, the government assumes
the risk of increases in the costs of performance by agreeing to repay the contractor for all
“allowable,” “reasonable,” and “allocable” costs of performing specified work, up to a total cost
provided for in the contract. Additionally, under certain types of cost-reimbursement contracts,
the contractor may be entitled to profit in the form of fixed fees, or incentive or award fees.
Other types of contracts are also recognized. For example, the various types of incentive
contracts—fixed-price incentive contracts, cost-plus-incentive-fee contracts, cost-plus-award-fee
contracts—are often characterized as occupying a middle ground between fixed-price and cost-
reimbursement contracts because the parties share the risk by basing the contractor’s profits, in
part, on the cost or quality of its performance. In addition, there are (1) time-and-materials and
labor-hour contracts, wherein the government pays the contractor hourly rates for labor and/or
the costs of materials; (2) indefinite-delivery contracts, wherein the contractor agrees to deliver
supplies or services at future dates unspecified at the time of contracting; (3) letter contracts,
which are used prior to the execution of a formal (i.e., definitized) contract; and (4) basic
agreements and basic ordering agreements, which are generally not themselves contracts, but
contain terms applicable to future contracts or orders between the parties.
In a few cases, federal law expressly restricts the use of particular types of contracts. Namely:
• the use of cost-plus-a-percentage-of-cost contracts—which provide for the
government to reimburse contractors’ costs and pay them a percentage of these
costs as an allowance for profit—is prohibited;
• the use of any type of cost-reimbursement contract to acquire “commercial
items” is prohibited; and
• contracts resulting from “sealed bidding” must be firm-fixed-price or fixed price
with an economic adjustment.
Aside from these restrictions, however, the determination as to which type of contract to use is
generally within the contracting officer’s discretion.
The types of contracts used by federal agencies have long been of interest to Congress and the
executive branch, as they have sought to ensure that the most appropriate type of contract is used
to acquire particular supplies or services. Early on, the use of cost-plus-a-percentage-of-cost
contracts prompted concern among Members of the Continental Congress that some contractors
ran up their costs in order to recover larger fees. Such contracts were later prohibited and, more
recently, concerns have centered upon the use of other types of cost reimbursement contracts.
President Obama articulated a “preference” for fixed-price type contracts in his March 4, 2009,
memorandum on government contracting, which his Administration has sought to implement in
various ways.
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Contract Types: Legal Overview

Contents
Selecting the Contract Type ............................................................................................................. 2
Types of Contracts ........................................................................................................................... 3
Fixed-Price Contracts ................................................................................................................ 4
Cost-Reimbursement Contracts ................................................................................................. 8
Incentive Contracts .................................................................................................................. 10
Time-and-Materials and Labor-Hour Contracts ...................................................................... 12
Indefinite-Delivery Contracts .................................................................................................. 13
Letter Contracts ....................................................................................................................... 16
Agreements .............................................................................................................................. 18

Tables
Table 1. Types of Fixed-Price Contracts .......................................................................................... 5
Table 2. Types of Cost-Reimbursement Contracts ........................................................................... 8

Contacts
Author Contact Information........................................................................................................... 18
Acknowledgments ......................................................................................................................... 19

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Contract Types: Legal Overview

his report provides an overview of the various contract types (e.g., fixed-price, cost-
reimbursement) used in federal procurement and the legal requirements pertaining to each.
TThe types of contracts used by federal agencies have long been of interest to Congress and
the executive branch, as they have sought to ensure that the most appropriate type of contract is
used to acquire particular supplies or services. Early on, the use of cost-plus-a-percentage-of-cost
contracts—which provide for the government to reimburse contractors’ costs and pay them a
percentage of these costs as an allowance for profit—prompted concern among Members of the
Continental Congress that some contractors ran up their costs in order to recover larger fees.1
Such contracts were later prohibited2 and, more recently, concerns have centered upon the use of
other types of cost reimbursement contracts.3 President Obama articulated a “preference” for
fixed-price type contracts in his March 4, 2009, memorandum on government contracting,4 which
his Administration has sought to implement in various ways.5
The report begins by summarizing the legal prohibitions upon, or requirements for, the use of
particular types of contracts. It then explains the differences between the various types of
contracts, as well as the primary constraints that are placed upon the use of each type by the
Federal Acquisition Regulation (FAR) and other provisions of law. The report focuses on the
contract types included in Part 16 of the FAR. Some of these types are legally binding contracts;
others are agreements that, while not necessarily legally binding, establish the terms and
conditions of future binding contracts. The report does not discuss what some may describe as
other “types” of procurement contracts (e.g., performance-based, share-in-savings, interagency,
multiyear).6 It also does not directly address orders or options because they are not types of
contracts.7

1 See, e.g., James F. Nagle, History of Government Contracting 25-26 (2d ed. 1999).
2 See P.L. 81-152, §304(b), 63 Stat. 395 (June 30, 1949) (codified, as amended, at 41 U.S.C. §3905) (procurements of
civilian agencies); P.L. 84-508, §2306(a), 70A Stat. 130 (May 9, 1956) (codified, as amended, at 10 U.S.C. §2306(a))
(procurements of defense agencies); 48 C.F.R. §16.102(c).
3 See Dep’t of Defense, Office of the Inspector General, Audit Report, Acquisition Processes and Contract
Management, DoD Needs to Improve Processes for Issuing and Managing Cost-Reimbursement Contracts, Nov. 7,
2014, available at http://www.dodig.mil/pubs/report_summary.cfm?id=6039 (finding that contracting personnel did not
“consistently implement” the Federal Acquisition Regulation’s (FAR’s) requirements as to the use of cost-
reimbursement contracts for 411 of the 604 contracts reviewed); Gov’t Accountability Office, HealthCare.gov:
Ineffective Planning and Oversight Practices Underscore the Need for Improved Contract Management, July 2014, at
14, available at http://www.gao.gov/assets/670/665179.pdf (noting that the contracts used for developing
HealthCare.gov were cost-plus-fixed-fee contracts, which are “considered high risk for the government because of the
potential for cost escalation and because the government pays a contractor’s allowable cost of performance regardless
of whether the work is completed”).
4 The White House, Office of the Press Secretary, Government Contracting, Mar. 4, 2009, at ¶ 3, available at
http://www.whitehouse.gov/the_press_office/Memorandum-for-the-Heads-of-Executive-Departments-and-Agencies-
Subject-Government
5 For example, the Department of Defense (DOD)—the largest federal procuring agency—amended its regulations in
2011 to require contracting officers to “give particular attention” to the use of fixed-price incentive (firm target)
contracts, especially for acquisitions moving from development to production. See Dep’t of Defense, Defense Federal
Acquisition Regulation Supplement; Increase the Use of Fixed-Price Incentive (Firm Target) Contracts, 76 Fed. Reg.
57677 (Sept. 16, 2011) (codified at 48 C.F.R. §216.403-1). However, more recently, DOD has indicated a focus upon
the employment of other “appropriate contract types,” with particular emphasis on the use of incentive-type contracts.
See DOD, Office of the Under Secretary of Defense, Acquisition, Technology and Logistics, White Paper, Better
Buying Power 3.0, Sept. 19, 2014, at 5, available at http://www.acq.osd.mil/docs/Better_Buying_Power_30-
091914.pdf.
6 The report also does not discuss task order/delivery order (TO/DO) contracts or multiple-award task-order contracts
(MATOCs) as distinct types of federal procurement contracts. As the FAR explains, requirements contracts and ID/IQ
contracts can be described as TO/DO contracts. 48 C.F.R §16.501-2(a). Similarly, any type of indefinite-delivery
(continued...)
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Selecting the Contract Type
In a few cases, federal law expressly restricts the use of particular types of contracts. Namely:
• The use of cost-plus-a-percentage-of-cost contracts—which provide for the
government to reimburse contractors’ costs and pay them a percentage of these
costs as an allowance for profit—is prohibited,8 and agency prime contracts must
generally prohibit cost-plus-a-percentage-of-cost subcontracts.9
• The use of any type of cost-reimbursement contract to acquire “commercial
items” is prohibited.10 Contracts for commercial items must instead be firm-
fixed-price or fixed-price with economic price adjustment contracts,11 or of other
types (e.g., time-and-materials, indefinite-delivery/indefinite-quantity (ID/IQ))
that price supplies or services on a firm-fixed-price or fixed-price-with-an-
economic-price-adjustment basis.12
• Contracts resulting from “sealed bidding” must be firm-fixed-price or fixed price
with an economic adjustment.13

(...continued)
contract could be a MATOC. 48 C.F.R. §16.500(a).
7 An order is a request for delivery of goods or provision of services issued to a vendor currently holding a contract, or
under an existing agreement. An option is a “unilateral right in a contract by which, for a specified time, the
Government may elect to purchase additional supplies or services called for by the contract, or may elect to extend the
term of the contract.” 48 C.F.R. §2.101.
8 P.L. 81-152, §304(b), 63 Stat. 395 (June 30, 1949) (codified, as amended, at 41 U.S.C. §3905) (procurements of
civilian agencies); P.L. 84-508, §2306(a), 70A Stat. 130 (May 9, 1956) (codified, as amended, at 10 U.S.C. §2306(a))
(procurements of defense agencies); 48 C.F.R. §16.102(c). Despite this prohibition, agencies sometimes inadvertently
enter cost-plus-a-percentage-of-cost contracts, which are generally seen to be void because they are unlawful. See, e.g.,
Urban Data Sys., Inc. v. United States, 699 F.2d 1147 (Fed. Cir. 1983), aff'g Urban Data Sys., Inc., GSBCA 5545, 81-2
BCA ¶ 15,254 (1981) (finding that two contracts whose price adjustment clauses provided for item or unit prices to be
audited after performance, with the contract prices adjusted by 5 to 10% based upon the audit findings, constituted cost-
plus-a-percentage-of-cost systems of contracting and were thus void).
9 48 C.F.R. §16.102(c). Agencies may opt not to include the clause prohibiting cost-plus-a-percentage-of-cost
subcontracts in their prime contracts only when the prime contract is a firm-fixed-price contract. Id.
10 48 C.F.R. §16.301-3(b). For purposes of federal procurement law, the term commercial item includes “[a]ny item,
other than real property, that is of a type customarily used by the general public or by non-governmental entities for
purposes other than governmental purposes, and (i) [h]as been sold, leased, or licensed to the general public; or (ii)
[h]as been offered for sale, lease, or license to the general public ....” 48 C.F.R. §2.101.
11 48 C.F.R. §16.201(a).
12 The Services Acquisition Reform Act (SARA) of 2003 explicitly authorized agencies to use time-and-materials and
labor-hour contracts to acquire commercial items. See P.L. 108-136, §1432, 117 Stat. 1672 (Nov. 24, 2003). Before
SARA was enacted, the FAR prohibited the use of contracts that were not fixed-price to acquire commercial items. See
48 C.F.R. §12.207 (2002) (“Agencies shall use firm-fixed-price contracts or fixed-price contracts with economic price
adjustment for the acquisition of commercial items…. Use of any other contract type to acquire commercial items is
prohibited.”).
13 48 C.F.R. §16.102(a). Sealed bidding is one of two main source-selection methods used by the federal government.
In sealed bidding, the procuring activity awards the contract to the lowest-priced, qualified, responsible bidder without
conducting negotiations with the bidders. This is in contrast to the other main source-selection method, negotiated
procurement, wherein the procuring activity bargains with offerors after receiving proposals, and awards the contract to
the offeror whose proposal rates most highly on evaluation criteria that include, but are not limited to, cost or price. In
the case of negotiated procurements, any type or combination of types of contracts allowed under Subpart 16 of the
FAR may be used. 48 C.F.R. §16.102(b).
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Aside from these restrictions, however, selection of the contract type for a particular procurement
is generally within the contracting officer’s discretion.14 The contracting officer typically decides
on the contract type prior to issuing a solicitation. This decision is made after considering a range
of factors including the degree of price competition in the procurement, the type and complexity
of the requirements, the urgency of the requirements, the period of performance or length of the
production run, and the acquisition history.15 These factors can cut in various ways in any given
procurement. For example, while the requirements might be simple enough for a fixed-price
contract, the procuring activity’s need for them might be urgent, a circumstance which could be
seen to justify use of cost-reimbursement contracts.16 However, particularly in negotiated
procurements, selection of the contract type can also be “a matter for negotiation” between the
“procuring activity”17 and the contactor. Most reports by the Government Accountability Office
or agency inspectors general discussing agencies’ use of particular types of contracts allege not
that the type used was unlawful but that it was imprudent because it left the government
vulnerable to paying too much, especially if agency oversight of contractor performance was
inadequate.18
Provided they do not unilaterally modify particular contracts, procuring activities may generally
change the type of contract used in the course of an acquisition program, a series of contracts for
recurring requirements, or a single long-term contract, so as to shift more risk to the contractor as
the uncertainties associated with the procurement are reduced.19
Types of Contracts
Federal procurement contracts are commonly divided into two main types—fixed-price and cost-
reimbursement—that primarily differ as to whether the government or the contractor bears the
risk of increases in the costs of performance (e.g., wages, materials). With a fixed-price contract,

14 See, e.g., Am. Tel. & Tel. Co. v. United States, 307 F.3d 1374, 1379 (Fed. Cir. 2002) (“[T]he regulations entrust the
contracting officer with especially great discretion, extending even to his application of procurement regulations.”);
Master Sec., Inc., Comp. Gen. Dec. B-232263 (Nov. 7, 1988) (denying a protest that alleged the contracting officer’s
proposed use of a firm-fixed-price contract for three years of work was improper because it would impose an inordinate
risk of high labor costs on the contractor).
15 48 C.F.R. §16.104(a)-(l).
16 See HealthCare.gov: Ineffective Planning and Oversight Practices, supra note 3, at 11 (“[Agency] contracting
officials explained that meeting project deadlines was a driving factor in a number of acquisition planning activities,
such as the selection of a cost-reimbursement contract ...”).
17 48 C.F.R. §16.103(a). A procuring activity is any component of an executive agency with significant acquisition
functions that is designated as such by the head of the agency. 48 C.F.R. §2.101.
18 See, e.g., Treasury Inspector General for Tax Administration, Current Practices Might Be Preventing Use of the Most
Advantageous Contractual Methods to Acquire Goods and Services, Feb. 10, 2009, at 2-3, available at
http://www.treas.gov/tigta/auditreports/2009reports/200910037fr.html (reporting that 33 of 40 contracts reviewed were
cost-reimbursement, time-and-materials, or labor-hour, but finding that the contracts were not improper based on the
associated statements of works); Gov't Accountability Office, Troubled Asset Relief Program: Additional Actions
Needed to Better Ensure Integrity, Accountability, & Transparency, GAO-90-161, Dec. 2008, at 36-37, available at
http://www.gao.gov/new.items/d09161.pdf (noting extensive use of time-and-materials contracts and suggesting that
there needs to be close government supervision to ensure that costs are contained).
19 See, e.g., 48 C.F.R. §16.103(c); Gov’t Accountability Office, Troubled Asset Relief Program: Status of Efforts to
Address Transparency and Accountability Issues, GAO-09-417T, Feb. 24, 2009, at 3 & 10, available at
http://www.gao.gov/new.items/d09296.pdf (recommending that agencies shift toward fixed-price contracts as program
requirements are better defined).
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the contractor agrees to supply certain supplies or services to the government at the price
specified in the contract. This means that, absent some provision for price adjustment in the
contract, the contractor assumes the risk that the costs of performance will exceed the contract
price.20 In contrast, with a cost-reimbursement contract, the government agrees to pay certain
costs that the contractor incurs in providing the supplies or services. While payment may only be
made for “allowable,” “reasonable,” and “allocable” costs, up to a total cost specified in the
contract,21 the government assumes the risk that the costs of performance will increase over the
term of the contract. While shifting as much risk as possible from the government to the
contractor might seem like a good idea,22 the FAR instructs contracting officers to use contract
types that result in “reasonable contractor risk,”23 in part because contractors who are forced to
assume excessive risk may cease to be available as contracting partners for the government.24
Contracts can also be divided into other types, including (1) incentive contracts, (2) letter
contracts, (3) ID/IQ contracts, and (4) time-and-materials (T&M) contracts, as discussed below.
Particular contracts may display features of various types (e.g., pricing on both fixed-price and
cost-reimbursement bases for different line items) and could potentially be of multiple types (e.g.,
an ID/IQ T&M letter contract).25
Determining the type of a particular contract is a question of law,26 and contract language stating
that a contract is of a certain type is not necessarily dispositive.27
Fixed-Price Contracts
The various types of fixed-price contracts, described in Table 1, provide for the contractor to
receive a specified (i.e., fixed) price for supplying certain supplies or services to the government.
With some types of fixed-price contracts, the price is fixed without the possibility of change,
absent modifications by the government or defective performance by the contractor, at the time of

20 See, e.g., Cleveland Telecomm. Corp. v. United States, 39 Fed. Cl. 649 (1997) (contractor not entitled to
reimbursement for unforeseen premium wage payments); D.W. Clark, Inc., ASBCA 45562, 94-3 BCA ¶ 27,132 (1994)
(contractor solely responsible for increases in material costs absent an economic price adjustment clause in the
contract).
21 48 C.F.R. §52.216-7 (allowable cost and payment); 48 C.F.R. §52.232-20(a) (limitation of cost).
22 See, e.g., Firm-Fixed-Price Contract Awards Require Discipline on DOD’s Part, Comptroller Says, Fed. Cont. Daily,
Mar. 20, 2009 (quoting some who would place all risk of cost overruns on the contractors).
23 48 C.F.R. §16.103(a).
24 See, e.g., John Cibinic, Jr. & Ralph C. Nash, Jr., Formation of Government Contracts 1080 (3d ed. 1998).
25 See, e.g., J.A. Jones Constr. Co., ASBCA 43344, 96-2 BCA ¶ 28,517 (1996) (contract displaying elements of firm-
fixed price and cost-sharing contracts); Ben Bain, DHS Procurement Office Eyes Contract Hybrids, Wash. Tech., Dec.
3, 2009, available at http://washingtontechnology.com/Articles/2009/12/07/WEEK-DHS-contracting-eagle.aspx. A
“hybrid contract” is one that displays features of multiple types.
26 See, e.g., Coastal Gov’t Servs., Inc., ASBCA 49625, 97-1 BCA ¶ 28,888 (1997) (“The determination of the contract
type is a matter of law, … and we are not bound either by what the contract is called or by the label attached to it by the
parties.”).
27 See, e.g., LSI Serv. Corp. v. United States, 422 F.2d 1334 (Ct. Cl. 1970) (finding that a contract titled “Cost
Reimbursement Contract” was a fixed-price contract because it contained a clause limiting the maximum total cost,
including the contractor’s fee, to a stated amount); Franklin Co., ASBCA 9750, 65-1 BCA ¶ 4,767 (1965), aff'd
Franklin Co. v. United States, 381 F.2d 416 (Ct. Cl. 1967) (finding that the contracts in question were not requirements
contracts, despite being designated as such, because they provided for the supply of the same kind of services in the
same place, and there cannot be two simultaneous requirements contracts for the same services in the same place).
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contracting (e.g., firm-fixed-price contracts). With others, the price is fixed at the time of
contracting but could later change if specified circumstances change (e.g., fixed-price contracts
with economic price adjustments,28 fixed price contracts with prospective price redetermination,
fixed-ceiling price contracts with retroactive price redetermination29). The extent of possible
changes in price is sometimes restricted at the time of contracting (e.g., fixed-ceiling-price
contracts with retroactive price redetermination). At other times, it may be left open (e.g., fixed-
price contracts with economic price adjustments).
Fixed-price contracts are generally for the provision of specified quantities of supplies or
services. However, some provide a specified fee in return for the contractor’s expending a
specified level of effort, regardless of whether particular objectives are realized (e.g., firm-fixed-
price, level-of-effort term contracts).
Table 1. Types of Fixed-Price Contracts
Type
Description
Use
Conditions on Use
Firm-fixed-price
Contractor agrees to provide
Used when acquiring
n/a
contracts
supplies or services to the
commercial items or other
procuring activity for a
supplies and services when

specified price
there are reasonably definite
specifications, and fair and
reasonable prices can be
established at the outset

Fixed-price
Contractor agrees to provide
Used when the stability of
Contracting officer must
contracts with
supplies or services to the
market or labor conditions
determine that a price
economic price
procuring activity for a
during an extended period of
adjustment clause is necessary
adjustmentsa
specified price that could be
contract performance is
to protect the contractor and
adjusted if certain conditions
uncertain, and contingencies
government against significant
change during performance of
that would otherwise be
fluctuations in costs, or to
the contract
included in the contract price
provide for price adjustment
can be identified and
in the event of changes in the
separately addressed in the
contractor’s established prices
contract
Fixed-price
Contractor receives a firm
Used to acquire quantity
Negotiations have established
contract with
fixed price for a specified
production or services when
that conditions for use of
prospective
initial period of performance,
it is possible to negotiate a fair firm-fixed price contract are
price
with the price for later
and reasonable firm fixed
not present, and a fixed-price
redetermination
periods revised in an equitable price for the initial period but
incentive contract is not more
manner based on variables
not for later ones
appropriate; the contractor’s

28 Contracting officers have substantial discretion in determining whether to include an economic price adjustment
clause in a fixed-price contract, and their determinations about whether to include such a clause generally will not be
reversed by judicial or administrative tribunals. See, e.g., B&P Refuse Disposal, Inc., Comp. Gen. Dec. B-253661
(Sept. 16, 1993); Master Security, Inc., Comp. Gen. Dec. B-232262 (Nov. 30, 1988); Sentinel Elecs., Inc., Comp. Gen.
Dec. B-212770 (Dec. 20, 1983).
29 Some commentators have suggested that fixed-price contracts with retroactive price redetermination are really cost-
plus-a-percentage-of-cost contracts because profit is computed based on a percentage of the costs after performance.
See, e.g., 2-19 Gov't Cont.: L., Admin. & Proc. §19.40. The courts, however, have historically rejected this argument
on the grounds that Congress explicitly prohibited cost-plus-a-percentage-of-cost contracts but has permitted fixed-
price contracts with retroactive price redetermination. See Nat’l Elec. Labs., Inc. v. United States, 180 F. Supp. 337,
340 (Ct. Cl. 1960) (“There probably is some difference but not enough, we think, to justify us in treating the latter
[retroactive] type of price provisions as illegal.”).
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Type
Description
Use
Conditions on Use
agreed upon by the partiesb
accounting system is adequate
for redetermination; pricing
periods can be made to
conform to accounting
system; and there is
reasonable assurance
redetermination will take
place as scheduled
Fixed-ceiling-
Contractor receives no more
Used for research and
Contractor’s accounting
price contracts
than a fixed ceiling price that
development contracts whose
system is adequate for price
with retroactive
was agreed upon when the
anticipated value is less than
redetermination; there is
price
contract was formed; the
$150,000 when other fixed-
reasonable assurance
redetermination
determination of the actual
price contracts cannot be
redetermination will take
price occurs after contract
used
place as scheduled; and the
performance, based on
head of the contracting
previously agreed upon
activity (or other higher-level
variables
officials) approves use in
writing
Firm-fixed-price, Contractor receives a fixed
Investigation or study in a
Work required cannot
level-of-effort
amount for providing a certain research and development
otherwise be clearly defined;
term contracts
level of effort over a certain
area whose anticipated value
required level of effort is
period of time on work that
is generally less than
identified and agreed upon in
“can be stated only in general
$150,000;c usually yields a
advance; and there is
terms”
report describing the R&D
reasonable assurance that the
results
intended result cannot be
achieved by less effort
Source: Congressional Research Service, based on Subpart 16.2 of the FAR.
a. Economic price adjustment clauses themselves can be of three types, depending upon whether the
adjustment is made based upon (1) established prices, (2) the actual costs of labor or material, or (3) cost
indexes of labor or material. 48 C.F.R. §16.203-1(a).
b. The initial performance period should be the longest possible period allowing for a “fair and reasonable firm
fixed price,” and the later performance periods should be a minimum of 12 months. 48 C.F.R. §16.205-2(a).
c. Use of firm-fixed price, level-of-effort term contracts valued in excess of $150,000 must be approved by the
chief of the contracting activity. 48 C.F.R. §16.207-3(d).
Fixed-price contracts are generally favored by policy makers because the contractor, not the
government, assumes the risk of increases in the costs of performance.30 The government’s
liability is typically limited to the contract price, so long as the contract does not have a price
adjustment clause and the government has not actually or constructively modified the contract.31
If the costs of labor or materials increase during performance of the contract, the contractor must
absorb these costs, even if doing so means choosing between performing the contract at a loss and
breaching the contract. Additionally, the government can generally rely on the contractor to
finance performance under a fixed-price contract.32 This is because, unless the government agrees

30 See, e.g., Formation of Government Contracts, supra note 24, at 1061.
31 See, e.g., McDonnell Douglas Corp. v. United States, 37 Fed. Cl. 295 (1997) (when the government orders changes,
the contractor is no longer required to deliver at the contract price, regardless of increases in performance costs, so long
as the increases resulted from the government’s changes); Martin-Copeland Co., ASBCA 26551, 83-2 BCA ¶ 16,752
(1983) (contractor not entitled to relief when the price of gold increased by 350% because it had assumed the risk that
the price would not increase beyond the 10% provided for in the price adjustment clause).
32 See, e.g., Formation of Government Contracts, supra note 24, at 1061.
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to provide financing in the form of progress payments, it pays only for completed or delivered
work.33 With cost-reimbursement contracts, in contrast, the contractor needs to provide only a
minimal amount of financing because its costs are reimbursed on a regular basis.34 Further, fixed-
price contracts are generally simpler for the government to administer because there is typically
no need to audit the contactor’s books or determine whether particular costs are allowable under
the contract.35 Rather, the government can pay the agreed-upon price upon acceptance of the
supplies or services, or as otherwise scheduled under the contract.36
Fixed-price contracts are not without their drawbacks, however, as some commentators have
noted.37 Regardless of the type of fixed-price contract used, the government runs the risk of
overpaying for supplies and services, especially if it overestimates its requirements.38 It is not
entitled to a price reduction if the contractor’s actual costs are less than anticipated,39 and certain
payments that are incorrectly made may be recoverable under cost-reimbursement contracts but
not under fixed-price contracts.40 With firm-fixed-price contracts, in particular, the government
could also (1) pay higher prices than would have been paid under cost-reimbursement contracts;41
(2) have to convert the contract to another type to obtain completion of performance;42 or (3)
defend lawsuits filed by contractors attempting to recover increases in performance costs by
alleging that the government constructively modified the contract.43 Similarly, with fixed-price

33 Id. Progress payments made on the basis of percentage of completion to construction contractors and architect-
engineers are considered invoice payments. 48 C.F.R. §32.103. Progress payments made on the basis of performance
milestones are considered financing payments. 48 C.F.R. §32.102(f). Any other progress payments based on costs are
generally seen to be “unusual” and may be made only in exceptional cases. 48 C.F.R. §32.501.
34 See, e.g., Formation of Government Contracts, supra note 24, at 1061.
35 See, e.g., 2-19 Gov’t Cont.: L., Admin. & Proc. §19.20 (2009).
36 Acceptance occurs when an authorized representative of the government assumes ownership of identified supplies
tendered, or approves specific services rendered, as partial or complete performance of the contract. See 48 C.F.R.
§46.101.
37 See, e.g., Formation of Government Contracts, supra note 24, at 1080.
38 North Chicago Disposal Co., ASBCA 25535, 82-1 BCA ¶ 15,488 (1981) (government could not recover the amounts
it paid the contractor when it contracted for removal of “wet garbage” from galleys at the Great Lakes Naval Base and
then did not use the service because the galley personnel were unaware of it and disposed of the garbage in-house);
Rolligon Corp., ASBCA 8812, 65-2 BCA ¶ 15,488 (1965) (government liable for the full contract price when it leased
two experimental vehicles from the contractor for a one-year testing-and-evaluation period and then discontinued
testing after one month).
39 Penker Constr. Co. v. United States, 96 Ct. Cl. 1 (1942) (government could not deduct payments from a fixed-price
contract when the number of yards of materials excavated was less than the government had estimated it would be).
40 Gould, Inc., ASBCA 46759, 97-2 BCA ¶ 29,254 (1997), reaff’d on recons. 98-1 BCA ¶ 29,469 (1998) (when the
contractor over-funded pension accounts because of incorrect actuarial assumptions, the government was entitled to a
credit on costs billed to cost-recovery contracts, but not on costs billed to firm-fixed-price contracts).
41 See, e.g., Commission on Army Acquisition and Program Management in Expeditionary Operations, Urgent Reform
Required: Army Expeditionary Contracting 38 (2007) (reporting that contractors had to price firm-fixed-price contracts
higher in order to cover possible risks of performing in war zones).
42 See, e.g., General Dynamics Corp. v. United States, 671 F.2d 474 (Ct. Cl. 1982) (government converting a firm-
fixed-price contract into a cost-reimbursement contract in order to obtain completion of the work); Ball Bros. Research
Group, NASABCA 1277-6, 80-2 BCA ¶ 14,562 (1980) (same).
43 See, e.g., McDonnell Douglas Corp. v. United States, 37 Fed. Cl. 295 (1997) (when the government orders changes,
the contractor is no longer required to deliver at the contract price, regardless of increases in performance costs, so long
as the increases resulted from the government’s changes). In one case, Northrop Grumman reportedly sued to recover
$14 million due to alleged modifications to the fixed-price portions of a $26 million contract to develop a prototype
communications system. See, e.g., Northrop Grumman May Sue for Overrun on $26 Million Prototype Contract, COFC
Rules, 70 Fed. Cont. Rep. 417 (Oct. 26, 1998).
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contracts with economic price adjustment clauses, the government could be vulnerable to
“significant and unanticipated price increases,” especially if the clauses do not adequately protect
the government’s interests.44 However, refusal to use economic price adjustment clauses where
significant economic fluctuations are possible could result in the government paying higher prices
because fewer contractors will compete for such contracts.45
Cost-Reimbursement Contracts
The various cost-reimbursement contracts, described in Table 2, provide for the government to
pay the contractor, at a minimum, allowable costs incurred in performing the contract, up to a
total cost specified in the contract. As used here, “costs” do not necessarily include all expenses
that the contractor incurred in performing the contract. Rather, costs are reasonable expenses that
are allocable to the contract and reimbursable by the government under the terms of the contract
(i.e., allowable).46
The types of cost-reimbursement contracts differ in whether the contractor recovers only costs
(e.g., cost contracts, cost-sharing contracts) or whether there is some allowance for profit (e.g.,
cost-plus-fixed-fee contracts, cost-plus-a-percentage-of-cost contracts). Some contracts are with
vendors that are nonprofits (e.g., cost contracts), or that at least are not expecting to profit from
the contract (e.g., cost-sharing contracts). Others are with contractors who anticipate making a
profit (cost-plus-fixed-fee contracts).
Cost-plus-a-percentage-of-cost contracts are prohibited,47 and cost-reimbursement contracts may
not be used to acquire commercial items.48
Table 2. Types of Cost-Reimbursement Contracts
Type
Description
Use
Cost contracts
Contractor reimbursed for allowable costs up
Used for research and development projects,
to a specified total cost; no allowance for
especially those involving nonprofits (e.g.,
profit
colleges and universities)
Cost-sharing
Contractor is reimbursed for some allowable
Used when the contractor expects “substantial
contracts
costs; pays other costs itself
compensating benefits” (e.g., commercializing
the results of research and development)
Cost-plus-fixed-
Contractor is reimbursed for allowable costs
Used when requirements cannot be sufficiently

44 Office of the Under Secretary of Defense, Acquisition, Technology & Logistics, Follow-on Actions in Response to
OIG Report Notification: “Effect of Payments into Boeing Pension Funds on Economic Price Adjustment Clauses in
DoD Contracts,” Sept. 9, 2009, available at http://www.acq.osd.mil/dpap/policy/policyvault/USA005087-09-
DPAP.pdf (reporting $1.9 billion in price increases on contracts for the C-17 Globemaster aircraft, F/A-18 E/F Super
Hornet aircraft, and AH-64D Apache Longbow helicopter).
45 See, e.g., Formation of Government Contracts, supra note 24, at 1083.
46 48 C.F.R. §31.201-2 (allowable costs); 48 C.F.R. §31.201-3 (reasonable costs); 48 C.F.R. §31.201-4 (allocable
costs). Whether particular costs are reimbursable can, thus, vary depending upon the terms of the contract. However,
certain costs are per se unallowable under any contract. See, e.g., 48 C.F.R. §31.205-13(b)-(c) (costs associated with
gifts or recreation for employees (except for the costs of employees’ participation in company sponsored sports teams
or employee organizations designed to improve company loyalty, team work, or physical fitness) are unallowable).
47 See supra notes 8-9 and accompanying text.
48 48 C.F.R. §16.301-3(b).
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Type
Description
Use
fee contracts
up to the specified total cost and may receive
defined for a fixed-price contract, or
a fee fixed at the inception of the contracta
uncertainties involved in performance do not
permit costs to be estimated with sufficient
accuracy; use must be approved by an official
at least one level above contracting officer
Cost-plus-a-
Contractor is reimbursed for its costs and
Generally prohibited, even as a subcontract
percentage-of-
receives a certain percentage of these costs as
under most types of federal prime contracts
cost contracts
an allowance for profit
Source: Congressional Research Service, based on Subpart 16.3 of the FAR.
a. The fixed fee is independent of actual costs and is adjusted only if the procuring activity changes the work
to be performed under the contract. 48 C.F.R. §16.306(a).
As commentators have noted, cost-reimbursement contracts can be “high risk” for the
government because the contractor has little incentive to keep the performance costs down given
that the government will ultimately pay these costs.49 These risks are even greater when the
contractor is assured of not only recovery of its costs, but also profit based on a percentage of the
costs (i.e., cost-plus-a-percentage-of-cost contracts).50 Cost-reimbursement contracts also impose
certain administrative demands upon procuring activities that are generally not present with fixed-
price contracts. Among other things, procuring activities must (1) ensure that the contractor’s
accounting system is adequate for determining the costs applicable to the contract, and (2) have
adequate resources to award and manage a contract that is not firm-fixed price.51 Further, cost-
reimbursement contracts can give rise to disputes between the parties over whether particular
costs are allowable under or allocable to the contract.52
However, the alleged risks of cost-reimbursement contracts can be lessened with effective
government oversight of contractor performance,53 and the contracts themselves contain certain
protections for the government. Key among these protections are limitations on allowable costs
and total costs.54 The government is only required to reimburse the contractor for costs that are
reasonable, allowable under, and allocable to the contract, and the maximum total cost that the
government must potentially reimburse is fixed at the time of contracting. Under the terms of the
contract, the contractor must notify the government when costs approach or exceed this total. The
government then has the right—but not the obligation—to approve additional costs.55 If the
government approves additional costs, the contractor must continue working until the funds are
spent or performance is completed. However, if the government does not approve the additional

49 See, e.g., Executive Office of the President, Office of Management and Budget, Improving Government Acquisition,
July 29, 2009, at 2, available at http://www.whitehouse.gov/omb/assets/memoranda_fy2009/m-09-25.pdf.
50 Muschany v. United States, 324 U.S. 49, 61-62 (1944) (“The evil of such contracts is that the profit of the other party
to the contract increases in proportion to that other party’s costs expended in the performance.”).
51 48 C.F.R. §16.301-3(a)(3)-(4).
52 See, e.g., 2-19 Gov't Cont.: L., Admin. & Proc. §19.20.
53 See, e.g., Geoffrey Emeigh, DOD Acquisition Experts Chime in on SASC Weapon Systems Acquisition Reform
Agenda, Fed. Cont. Daily, Mar. 4, 2009 (quoting Jacques Gansler, former Under Secretary of Defense for Acquisition,
Technology & Logistics, as stating that the government has not been using cost-type contracts as effectively as it
could).
54 48 C.F.R. §52.216-7 (allowable cost and payment); 48 C.F.R. §52.232-20 (limitation of cost).
55 See, e.g., Eyler Assocs., ASBCA 16804, 75-1 BCA ¶ 11,320 (1975) (contracting officer has substantial discretion in
determining whether to fund an overrun); ARINC Research Corp., ASBCA 15861, 72-2 BCA ¶ 9,721 (1972) (same).
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costs, the contractor is expected to cease performance. If it does not cease performance, it
generally cannot recover any further costs from the government.56
Cost-plus-fixed-fee contracts are also subject to limitations on the amount of the fixed fee, which
generally cannot exceed 10% of the estimated cost (6% for architectural and engineering work;
15% for experimental, research, or development work).57
Incentive Contracts
The various types of incentive contracts—fixed-price incentive contracts, cost-plus-incentive-fee
contracts, and cost-plus-award-fee contracts—are often characterized as occupying a “middle
ground” between fixed-price and cost-reimbursement contracts because the parties share the risk
by basing the contractor’s profits, in part, on the cost or quality of its performance.58 The various
types of incentive contracts are alike in that they provide for the contractor to get (1) a specified
base amount and (2) the opportunity to earn additional fees (i.e., incentive or award fees) based
upon its performance in meeting cost, schedule, or technical goals under the contract.59 They
differ in the basis upon which the additional fee is determined and, in the case of incentive-fee
contracts, the circumstances in which they can be used.
With cost-plus-award-fee contracts, the award fee is entirely separate from the base fee,60 and is
determined based on the procuring activity’s subjective evaluation of the contractor’s
performance.61 Such determinations are generally final and generally considered to be exempt
from the “disputes clause” of the contract, which otherwise permits the contractor to contest
matters involving the contract’s terms or performance with the government.62 However, in
Burnside-Ott Aviation Training Center v. Dalton, the U.S. Court of Appeals for the Federal
Circuit held that such unilateral determinations by the government may be disputed and,

56 However, in certain circumstances, the government’s failure to fund a cost overrun could constitute an abuse of
discretion. See, e.g., Gen. Elec. Co. v. United States, 440 F.2d 420 (Ct. Cl. 1971) (government abused its discretion in
failing to fund a cost overrun when the circumstances were such that the contractor could not have known of the
overrun).
57 48 C.F.R. §15.404-4(c)(4)(i). The FAR authorizes payment of this fixed fee either (1) upon completion and delivery
of a specified end product or (2) after the contractor has worked at a specified level of effort for an agreed upon period
of time. 48 C.F.R. §16.306(d)(1)-(2). Payment upon completion is preferred and must be used “whenever the work …
can be defined well enough to permit development of estimates within which the contractor can be expected to
complete the work.” 48 C.F.R. §16.306(d)(3). Payment based upon work at a specific level of effort for an agreed upon
period of time may be used only when the contract requires the contractor “to provide a specific level of effort within a
definite time period.” 48 C.F.R. §16.306(d)(4).
58 See, e.g., Formation of Government Contracts, supra note 24, at 1061.
59 48 C.F.R. §16.403(a); 48 C.F.R. §16.405-1(a); 48 C.F.R. §16.405-2. Because exclusive focus upon meeting delivery
or technical performance goals can result in excessive costs, any contract including delivery or technical performance
goals must also include cost goals. See, e.g., 48 C.F.R. §16.402-4(b).
60 48 C.F.R. §16.405-2.
61 48 C.F.R. §16.401(e)(2). The FAR requires that cost-plus-award-fee contracts include award-fee plans, specifying
the procedures that the procuring activity will use when evaluating the contractor’s performance to determine award
fees. 48 C.F.R. §16.401(e)(3). Among other things, these plans provide for “evaluation period(s) to be conducted at
stated intervals during the contract period … so that the contractor will periodically be informed of the quality of its
performance and the areas in which improvement is expected.” 48 C.F.R. §16.401(e)(3)(vi).
62 41 U.S.C. §§7101-7109 (codification of the Contract Disputes Act); 48 C.F.R. §52.233-1 (standard disputes clause).
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potentially, reversed if “the discretion employed in making the decision is abused, for example, if
the decision was arbitrary or capricious.”63
With fixed-price incentive contracts and cost-plus-incentive-fee contracts, in contrast, the
incentive fee is determined based upon formulaic adjustments of the base fee.64 The formula for
fixed-price incentive contracts focuses upon “the relationship of total final negotiated cost to total
target cost”65 and can include either (1) a target cost, a target profit, a price ceiling, and a profit
adjustment formula, in the case of firm-target incentives;66 or (2) an initial target cost, an initial
target profit, an initial profit adjustment formula to be used in establishing the firm target profit,
the production point at which the firm target cost and firm target profit will be negotiated, and a
ceiling price that is the maximum that may be paid to the contractor (absent any adjustment), in
the case of successive-target incentives.67 The formula for cost-plus-incentive-fee contracts
focuses upon “the relationship of total allowable costs to total target costs”68 and includes a target
cost, a target fee, a minimum fee, a maximum fee, and a fee adjustment formula as components.69
The FAR arguably contemplates that cost-plus-incentive-fee contracts will be used more narrowly
than fixed-price incentive contracts.70
Contractors who fail to meet incentive-related goals often also fail to meet other terms of the
contract, which could carry different penalties. For example, failure to meet a technical
performance goal could be seen as a failure to meet a specification requirement. However, the
penalty for the former is a reduction in profits or fees, while the penalties for the latter could
involve rejection of the work by the contracting officer, redoing the work so that it meets the
specifications, or termination for default.71 Most contracts reportedly do not make clear that the
government is not entitled to a “double remedy” in these situations,72 but courts and boards of
contract appeals sometimes construe them to such an effect.73

63 107 F.3d 854, 860 (Fed. Cir. 1997), aff’g Burnside-Ott Aviation Training Center, ASBCA 43184, 96-1 BCA ¶
28,102 (1996). See also Textron Defense Sys., A Div. of AVCO Corp., ASBCA 47352, 47950, 96-2 BCA ¶ 28,332
(1996).
64 48 C.F.R. §16.403(a); 48 C.F.R. §16.405-1(a).
65 48 C.F.R. §16.403(a).
66 48 C.F.R. §16.403-1(a).
67 48 C.F.R. §16.403-2(a)(1)(i)-(v).
68 48 C.F.R. §16.405-1(a).
69 Id.
70 The FAR states that cost-plus-incentive-fee contracts are “appropriate” for “services or development and test
programs.” 48 C.F.R. §16.405-1(b)(1). Additionally, cost-plus-incentive-fee contracts, like other cost-reimbursement
contracts, cannot be used to acquire commercial items. 48 C.F.R. §301-3(b).
71 See generally CRS general distribution memorandum, Potential “Remedies” Available to the Government for a
Contractor’s Misconduct or Failure to Perform, Feb. 11, 2010, by Kate M. Manuel (copies available upon request from
the author).
72 Formation of Government Contracts, supra note 24, at 1145.
73 See, e.g., North Am. Aviation, Inc., ASBCA 11603, 68-1 BCA ¶ 6,998 (1968); Gen. Precision, Inc., ASBCA 11071,
66-2 BCA ¶ 5,904 (1966).
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Time-and-Materials and Labor-Hour Contracts
In a time-and-materials contract, the contractor is paid a fixed “hourly rate”74 for direct labor
expended during the contract’s performance (e.g., wages, overhead, general and administrative
expenses, profit75), as well as the actual cost of materials.76 The materials covered by a time-and-
materials contract can include direct materials, subcontracts for supplies or incidental services,
other direct costs, and applicable indirect costs.77 However, the FAR specifies that material
handling costs, which include “all appropriate indirect costs allocated to direct materials,” may be
part of the materials cost only if they are not part of the labor-hourly rate.78 It imposes this
requirement to ensure that material handling costs are not “paid twice” in a way that could result
in a prohibited cost-plus-percentage-of-cost system of contracting.79
A labor-hour contract is similar to a time-and-materials contract, except the contractor supplies
only direct labor, not materials.80
Subpart 16 of the FAR addresses procuring activities’ use of time-and-materials and labor-hour
contracts in general. It authorizes agencies to use such contracts only when:
• the parties cannot accurately estimate the extent or duration of the work, or
reasonably estimate costs, at the time of contracting;81
• the contracting officer prepares a determination and findings (D&F) that “no
other contract is suitable”;82 and
• the contract includes a ceiling price that the contractor exceeds at its own risk.83
Subpart 12 of the FAR imposes additional requirements upon use of time-and-materials and
labor-hours contracts to acquire commercial services.84 Under Subpart 12, agencies generally may

74 The FAR defines hourly rate as “the rate(s) prescribed in the contract for payment for labor that meets the labor
category qualification of a labor category specified in the contract that [is] (1) [p]erformed by the contractor; (2)
[p]erformed by the subcontractors; or (3) [t]ransferred between divisions, subsidiaries, or affiliates of the contractor
under a common control.” 48 C.F.R. §16.601(a). See 48 C.F.R. §16.601(c)(2) for more detailed requirements as to
fixed hourly rates.
75 48 C.F.R. §16.601(b)(1).
76 48 C.F.R. §16.601(b)(2).
77 48 C.F.R. §16.601(a). Direct materials are “those materials that enter directly into the end product, or that are used or
consumed directly in connection with the furnishing of the end product or service.” Id.
78 48 C.F.R. §16.601(c)(3).
79 See, e.g., Gen. Eng'g & Mach. Works v. O’Keefe, 991 F.2d 775 (Fed. Cir. 1993) (affirming a board holding that
recovery of a separate material handling charge and inclusion of material handling costs in the hourly rate of a time-
and-materials contract violated the prohibition on cost-plus-a-percentage-of-cost contracts because it allowed a “double
recovery”).
80 48 C.F.R. §16.602.
81 48 C.F.R. §16.601(c).
82 48 C.F.R. §16.601(d)(1). Additionally, the head of the contracting activity must approve the D&F “prior to the
execution of the base period when the base period plus any option periods exceeds three years.” 48 C.F.R.
§16.601(d)(1)(ii).
83 48 C.F.R. §16.601(d)(2). The contracting officer must document any subsequent changes in the ceiling price. Id.
84 There has been some uncertainty as to whether purchases under the Federal Supply Schedules, which list commercial
items, are subject to the requirements of Subpart 12 or just those of Subpart 16. The General Services Administration
reportedly has taken the position that the Federal Supply Schedules are not subject to Subpart 12 because the Federal
(continued...)
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use time-and-materials and labor-hour contracts to acquire commercial services only under
contracts or orders that were “competitively” awarded.85 Additionally, under Subpart 12, D&Fs
must not only conclude that “no other contract type … is suitable,” but must also:
1. include a description of the market research that was conducted to reach this
conclusion;
2. establish that it is not possible at the time of contracting or ordering to accurately
estimate the extent or duration of the work or anticipate the costs;
3. establish that the requirement is structured to maximize use of firm-fixed-price or
fixed-price with economic price adjustment contracts in future acquisitions for
the same requirements (e.g., limiting the length of the contract); and
4. describe plans to maximize the use of firm-fixed-price or fixed-price with
economic price adjustment contracts in future acquisitions.86
Indefinite-Delivery Contracts
The three types of indefinite-delivery contracts—definite-quantity, requirements, and indefinite-
delivery/indefinite-quantity (ID/IQ) contracts—are alike in that they provide for the contractor to
deliver supplies or services to the procuring activity at future dates unspecified at the time of
contracting. They differ in the quantity of supplies or services that the procuring activity must
order and, thus, in the circumstances in which they are generally used.
• Definite-quantity contracts provide for the procuring activity to order a fixed
quantity of supplies or services from the contractor over the term of the
contract.87 Such contracts are used when the procuring activity knows that it will
require a specific quantity of supplies or services that are regularly available or
will be available after a short lead time.88
• Requirements contracts, in contrast, provide for the procuring activity to order all
its “requirements” for supplies or services of the type provided for in the contract
from the contractor during the term of the contract.89 If the procuring activity has

(...continued)
Acquisition Streamlining Act (FASA) of 1994, not the Services Acquisition Reform Act (SARA) of 2003, authorized
use of time-and-materials and labor-hour contracts under the Federal Supply Schedules, and SARA, not FASA, is the
basis for the requirements in Subpart 12. See Gov't Accountability Office, Contract Management: Minimal Compliance
with New Safeguards for Time-and-Materials Contracts for Commercial Services and Safeguards Have Not Been
Applied to GSA Schedules Program, GAO-09-579, June 24, 2009, available at http://www.gao.gov/new.items/
d09579.pdf. See also CRS Legal Sidebar WSLG1120, Court Decision Raises Questions about the Rules Governing
Acquisitions of Commercial Items, by Kate M. Manuel.
85 48 C.F.R. §12.207(b)(1)(i)(A). For purposes of Subpart 12.2, this means (1) contracts awarded using competitive
procedures or procedures for other than full and open competition, provided that the procuring activity received offers
from two or more responsible offerors, or (2) orders issued under a multiple-award ID/IQ using the “fair opportunity”
procedures described below. 48 C.F.R. §12.207(b)(1)(i)(A)-(C). See infra note 105 and accompanying text for more
information on the “fair opportunity” procedures.
86 48 C.F.R. §12.207(b)(2)(i)-(iv). Subpart 12 similarly limits agencies’ authority to use ID/IQ contracts to acquire
commercial services. See 48 C.F.R. §12.207(c).
87 48 C.F.R. §16.502(a).
88 48 C.F.R. §16.502(b).
89 48 C.F.R. §16.503(a) (“A requirements contract provides for filling all actual purchase requirements of designated
(continued...)
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no requirements for these supplies or services, it generally “owes” the contractor
no orders.90 However, if the procuring activity has requirements and purchases
them from another vendor91 or, in some cases, develops additional in-house
capabilities to perform the work,92 it could potentially be found to have
terminated the contract for convenience or even breached the contract.93
Requirements contracts are used when the government anticipates recurring
needs for supplies or services, but cannot predetermine the precise quantities
needed during a definite period.94
• ID/IQ contracts are also used when the government anticipates recurring needs
but cannot specify the quantity needed.95 However, an ID/IQ contract does not
entitle the contractor to fill all the procuring activity’s needs for certain supplies
or services. Rather, the contractor is assured of orders for only the “minimum

(...continued)
Government activities for supplies or services during a specified contract period.”).
90 See, e.g., G.T. Folge & Co. v. United States, 135 F.2d 117 (4th Cir. 1943) (government not liable for failure to order
if it has no requirements for the supplies or services). Any estimates of quantity contained in the solicitation or the
contract are nonbinding. See, e.g., Franklin Co. v. United States, 381 F.2d 416 (Ct. Cl. 1967) (government not obligated
to furnish work orders up to the estimated amount); Kasehagen Sec. Servs., Inc., ASBCA 25629, 86-2 BCA ¶ 18,797
(1986) (contractor must fill orders above the estimate). However, the government could potentially be liable to the
contractor if the estimate was negligently prepared. See, e.g., Alert Care Ambulance Serv., VACAB 2844, 90-3 BCA ¶
22,945 (1990) (government failed to exercise due care in preparing the estimates because it did not consider historical
data regarding prior years’ requirements); Pied Piper Ice Cream, Inc., ASBCA 20605, 76-2 BCA ¶ 12,148 (1976)
(same). If feasible, the contract should specify a maximum quantity of supplies or services, orders in excess of which
the contractor is generally not required to meet. 48 C.F.R. §16.503(a)(2).
91 See, e.g., Rumsfeld v. Applied Cos., Inc., 325 F.3d 1328, 1339 (Fed. Cir. 2003) (“[T]he government breaches a
requirements contract when it has requirements for contract items or services, but diverts business from the contractor
and does not use the contractor to satisfy those requirements.”); Ready-Mix Concrete Co. Ltd. v. United States, 158 F.
Supp. 571 (Ct. Cl. 1958) (contractor entitled to an equitable adjustment if the government purchases the needed
supplies or services from any other source during the contract period).
92 Contract language stating that the contractor is entitled to supply those items “required to be purchased by the
government” will generally be construed to allow the procuring activity to develop additional in-house capacity during
the term of the contract. See, e.g., Export Packing & Crating Co., Inc., ASBCA 16133, 73-2 BCA ¶ 10,066 (1973);
Applied Painting & Decorating Co., ASBCA 15919, 73-2 BCA ¶ 10,358 (1973). However, language stating that the
contractor is entitled to supply items “in excess of the quantities which the activity may itself furnish with its own
capabilities” generally will not be so construed because it is read as referring to the procuring activity’s capabilities at
the time of contracting. See, e.g., Kozak Micro Sys., Inc., GSBCA 10519, 91-1 BCA ¶ 23,342 (1991) (“Where the
contract demands that the contractor provide all the required supplies or services of a named Government activity ‘in
excess of the quantities which the activity may itself furnish with its own capabilities,’ the document is understood to
refer to the capabilities in existence at the time the contract is awarded. The government may not develop and use
additional capabilities to eliminate a part of work that the contractor raised every expectation of receiving, and thereby
prevent the contractor from recovering its costs.”); Maya Transit Co., ASBCA 20186, 75-2 BCA ¶ 11,552 (1975)
(government not permitted to reorder its budget priorities and redistribute its capabilities to assume more bus routes for
its own drivers when the contract provided for the contractor to furnish bus services “in excess of the quantities which
the activity may itself furnish within its own capabilities”).
93 Courts often treat governmental failures to comply with the terms of procurement contracts as constructive
terminations of the contract. See, e.g., Nesbitt v. United States, 543 F.2d 583 (Ct. Cl. 1965); Integrity Mgmt. Int’l, Inc.,
ASBCA 18289, 75-1 BCA ¶ 11,235 (1975). However, they will generally not convert failure to order under a
requirements contract into a termination for convenience when the failure was in bad faith or based on circumstances
known to the government at the time of contracting. See, e.g., Torncello v. United States, 681 F.2d 756 (Fed. Cl. 1982)
(termination based on the contractor’s prices, which were known to the government at the time of contracting); Kalvar
Corp. v. United States, 543 F.2d 1298 (Ct. Cl. 1976) (termination in bad faith).
94 48 C.F.R. §16.503(b)(1).
95 48 C.F.R. §16.504(b).
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quantity” of supplies or services specified in the contract.96 This quantity must be
a “more than nominal amount,”97 but the Government Accountability Office has,
in at least one case, taken the view that $500 can be used as the guaranteed
minimum, regardless of the maximum ordering limitations or total contract value,
in the absence of reliable historical data suggesting otherwise.98
Under the various types of indefinite-delivery contracts, the procuring activity issues task or
delivery orders to the contractor when it requires supplies or services, a process which is
generally not subject to the Competition in Contracting Act’s requirements that agencies generally
obtain “full and open competition through the use of competitive procedures” when awarding
contracts. However, Congress has imposed certain competition requirements upon agencies
issuing orders under requirements and ID/IQ contracts, in particular. The Federal Acquisition
Streamlining Act (FASA) of 1994 established a “preference” for multiple-award contracts by
requiring agencies to use them, instead of single-award contracts, “to the maximum extent
practicable.”99 A multiple-award contract is one held by several vendors, each of whom can
receive orders under it, while a single-award contract is one held by one vendor, who is the only
vendor who can receive orders under it.100 This preference is generally seen to apply to ID/IQ
contracts,101 and could potentially also be said to apply to requirements contracts.102
FASA also requires agencies using multiple-award contracts to provide contractors “a fair
opportunity to be considered” when issuing task or delivery orders in excess of $3,000 unless
certain conditions apply.103 The National Defense Authorization Act for FY2008 (NDAA ‘08) and

96 See, e.g., 48 C.F.R. §16.504(a)(1); Peter J. Brandon, AGBCA 91-186-1, 92-1 BCA ¶ 24,648 (1991). Provided the
minimum quantity is ordered, the government is not liable for ordering similar supplies and services from other
contractors; failing to order any estimated quantities, even if those estimates were negligently prepared; or any costs
that the contractor incurs due to lack of orders. See, e.g., Bliss Co. v. United States, 74 Ct. Cl. 14 (1932) (government
not liable for losses due to the contractor’s plant being idled for lack of orders); Crown Laundry & Dry Cleaners,
ASBCA 39982, 90-3 BCA ¶ 22,993 (1990) (“[W]e do not examine the reasonableness of the estimates in indefinite
quantity contracts.”); Alta Constr. Co., PSCBA 1395, 87-2 BCA ¶ 19,720 (1987) (government’s awarding work orders
to a competitor of the contractor does not give rise to a breach of contract claim). An ID/IQ contract may also contain a
maximum quantity, orders in excess of which the contractor generally need not fill. 48 C.F.R. §16.504(a)(1).
97 Goldwasser v. United States, 325 F.2d 722 (Ct. Cl. 1963) (contract with a minimum quantity of $100 compared to
estimated price of $40,000 “would have been a one-sided bargain, bordering upon lack of mutuality”); Tennessee Soap
Co. v. United States, 126 F. Supp. 439 (Ct. Cl. 1954) (a $10 minimum order was nominal and thus insufficient).
98 Library of Congress, Comp. Gen. Dec. B-318046 (July 7, 2009).
99 P.L. 103-355, §1004, 108 Stat. 3249-54 (Oct. 13, 1994) (codified at 10 U.S.C. §2304a(d)(3)) (procurements of
defense agencies); id. at §1054, 108 Stat. 3261-65 (codified at 41 U.S.C. §4103(d)(4)(A)) (procurements of civilian
agencies).
100 A single-award ID/IQ contract differs from a requirements contract in that the procuring activity has not committed
to purchasing all its requirements for particular supplies and services from that contractor and is free to contract with
other vendors for the same supplies and services.
101 See, e.g., 48 C.F.R. §16.500(a) (“This subpart prescribes policies and procedures for making awards of indefinite-
delivery contracts and establishes a preference for making multiple awards of indefinite-quantity contracts.”).
102 See, e.g., Formation of Government Contracts, supra note 24, at 1191 (raising the question of whether single-award
requirements contracts violate FASA). See also Nations, Inc., Comp. Gen. Dec. B-272455 (Nov. 5, 1996) (finding such
a violation when the procuring activity proposed to issue a single requirements contract whose anticipated value was
over $10 million).
103 10 U.S.C. §2304c(b)(1)-(4); 41 U.S.C. §4106(c). For an agency to issue an order without providing contractors “a
fair opportunity to be considered,” one of the following conditions must be exist: (1) the agency’s need for the supplies
or services is of “unusual urgency;” (2) only one contractor is capable of providing the supplies or services; (3) the
order should be issued on a sole-source basis in the interests of economy and efficiency because it is “a logical follow-
on” to an order issued on a competitive basis; or (4) the order must be placed with a particular contractor to satisfy a
(continued...)
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regulations promulgated under its authority further strengthened the competition requirements for
orders under requirements and ID/IQ contracts by prohibiting agencies from using single-award
contracts whose anticipated value exceeds $103 million, including options, unless the agency
head makes certain determinations in writing.104 The NDAA ‘08 also defined what constitutes a
fair opportunity to be considered for orders in excess of $5.5 million under multiple-award
contracts.105
Also, in the interests of promoting competition, agencies are likewise prohibited from awarding
requirements contracts for “advisory and assistance services”106 in excess of three years and $12.5
million, including options, unless certain conditions are met.107
Letter Contracts
There are times when an agency’s need for a contractor’s supplies or services is so pressing that
the agency cannot wait for the execution of a formal (i.e., definitized) contract. However,
contractors recognize that performing in the absence of a legal commitment binding the
government to compensate them is risky and could result in their “being called a mere volunteer
and ... recover[ing] nothing.”108 As a result, the government developed letter contracts
(sometimes also referred to as undefinitized contracts).109 These are temporary contracts intended
to “authorize immediate commencement of … work” prior to the execution of the final
contract.110 Letter contracts typically state that a formal contract will be executed at a later date

(...continued)
minimum guarantee under an ID/IQ. Id.
104 P.L. 110-181, §843, 122 Stat. 236-39 (Oct. 14, 2008). Before using a single-award contract, the agency head must
find that (1) the orders expected under the contract are “so integrally related” that only a single source can reasonably
perform them; (2) the contract provides for only firm-fixed-price orders for supplies or services whose prices are
established in the contract; (3) only one source is qualified and capable of performing the work at a reasonable price; or
(4) because of exceptional circumstances, it is “necessary in the public interest” to award the contract to a single
source. Id. Agency heads must notify also Congress within 30 days after making a determination to award a single-
award contract in excess of $103 million. Id. P.L. 110-181 applies to the requirements and ID/IQ contracts of both
defense and civilian agencies. An earlier law had imposed similar restrictions on DOD’s requirements and ID/IQ
contracts, but this provision was subsequently repealed because it was redundant. See National Defense Authorization
Act for FY2009, P.L. 110-417, §863(f), 122 Stat. 4548 (Oct. 14, 2008) (repealing defense-specific requirements);
National Defense Authorization Act for FY2002, P.L. 107-107, §803, 115 Stat. 1179 (Dec. 28, 2001) (establishing
defense-specific requirements).
105 P.L. 110-181, §843. Under the NDAA, for contractors to have a “fair opportunity to be considered,” agencies must
provide them with (1) a notice of the task or delivery order that includes a clear statement of the agency’s requirements;
(2) a reasonable period of time to provide a proposal in response to the notice; (3) disclosure of the significant factors
and subfactors that the agency expects to consider in evaluating proposals and their relative importance; (4) a written
statement documenting the basis for the award and the relative importance of quality and price or cost factors, if the
award is to be made on a best-value basis; and (5) an opportunity for post-award debriefing. Id.
106 As used here, the term advisory and assistance services includes “those services provided under contract by
nongovernmental sources to support or improve: organizational policy development; decision-making; management
and administration; program and/or project management and administration; or R&D activities.” 48 C.F.R. §2.101.
107 Before issuing a solicitation for such a contract, the contracting officer or other designated official must determine
in writing that the services are “so unique or highly specialized that it is not practicable to make multiple awards.” 48
C.F.R. §16.503(d)(1).
108 2-19 Gov't Cont.: L., Admin. & Proc. §19.160 [1]. See also Baltimore & Ohio R.R. v. United States, 261 U.S. 592
(1923).
109 2-19 Gov't Cont.: L., Admin. & Proc. §19.160 [1].
110 Id.; 48 C.F.R. §16.603-1.
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and incorporate certain terms and conditions by reference.111 The use of letter contracts is subject
to numerous conditions,112 including a written determination from the head of the contracting
activity (or designee) that no other contract is suitable.113 Agencies are also prohibited from
“[c]ommit[ing] the Government to a definitive contract in excess of the funds available at the
time the letter contract is executed.”114 In the event that a definitive contract cannot be negotiated
because of failure to reach agreement as to price or fee after reasonable efforts, the contractor
must proceed with the work, and the contracting officer may determine a reasonable price or fee
with the approval of the head of the procuring activity.115
Courts may or may not consider letter contracts to be legally binding, depending upon the
language contained in the contracts. If, for example, the document contains a clear and
unconditional acceptance of the offer, then the government may be found to have been bound as
of the date it was issued.116 However, if the government’s acceptance is conditioned upon
execution of a formal contract, the document may not be seen as legally binding.117
Letter contracts are of particular concern to Congress because of the potential for agencies to
commit themselves to spending in excess of appropriations.118 Because letter contracts only
contain general terms, many terms and conditions, including price, often have not been negotiated
and agreed upon.119 As a result, the cost of the definite contract cannot easily be predicted.
Additionally, the Comptroller General once expressed concern that letter contracts may violate
the prohibition upon cost-plus-a-percentage-of-cost contracts when the definitive contract is not
executed until the work is finished.120 However, the latter view, in particular, has generally not
been seen to foreclose the use of letter contracts.

111 See Briggs & Turivas v. United States, 83 Ct. Cl. 664 (1936). The FAR requires contracting officers to include
within the letter contract the standard contract clauses for the type of contract that is contemplated by the letter contract.
48 C.F.R. §16.603-4(a).
112 See 48 C.F.R. §§16.603-2—16.603-3.
113 48 C.F.R. §16.603-3.
114 48 C.F.R. §16.603-3(a).
115 48 C.F.R. §16.603-2(c). The contractor is required to continue work under the standard contract clause found at 48
C.F.R. §52.216-25. However, because of the lack of detailed terms in the letter contract, litigation can result if the letter
is not converted into a detailed contract. See, e.g., Chrysler Corp., ASBCA 4749, 60-2 BCA ¶ 2,669 (1960).
116 See, e.g., Secretary of Navy, Comp. Gen. Dec. B-22324 (Dec. 15, 1941). So long as the letter is sufficiently clear
that the contractor can proceed with the work and the government can make substantial payments on the account,
courts will generally hold that a contract was created and therefore allow a contractor to sue, despite the absence of a
formal contract. Bass & Assocs. v. United States, 205 F.2d 1386 (Ct. Cl. 1974). Pre-contract costs are generally
recoverable only if they were incurred prior to definitization and directly pursuant to negotiations with the procuring
activity; and they would have been allowable if they had been incurred after definitization. See Integrated Logistics
Support Sys. v. United States, 47 Fed. Cl. 248, 256 (2000). The Government’s maximum liability for pre-contract costs
is “the estimated amount necessary to cover the contractor’s requirements for funds before definitization” but cannot
exceed 50% of the estimated costs of the definitized contract unless approved in advance by the authorizing official. 48
C.F.R. §16.603-2(d); see also General Servs. Admin., 33 Comp. Gen. 291 (1954).
117 See, e.g., Secretary of Commerce, Comp. Gen. Dec. B-21873 (Dec. 22, 1941).
118 For example, Congress has passed significant restrictions on the use of letter contracts in defense procurements. See
10 U.S.C. §2326.
119 2-19 Gov't Cont.: L., Admin. & Proc. §19.160 [1].
120 See General Servs. Admin., 33 Comp. Gen. 291 (1954).
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Agreements
Although they are included in Part 16 of the FAR, the two types of agreements—basic
agreements and basic ordering agreements—are not necessarily legally binding contracts.121
Rather, they are written instruments of understanding, negotiated between procuring activities and
contractors, that contain terms applicable to future contracts122 or orders123 between the parties.
Basic agreements and basic order agreements are used in different circumstances. Basic
agreements are used when the procuring activity anticipates awarding a “substantial number” of
contracts to a contractor with whom it has experienced “significant recurring negotiating
problems;”124 while basic ordering agreements are used when the procuring activity anticipates
acquiring a substantial, but presently unknown, quantities of supplies or services.125 However, the
two types of agreements are alike in that they must be reviewed annually before the anniversary
of their effective dates.126 Additionally, their terms may be changed only by modifications of the
agreement, not by any contracts incorporating the agreement or orders issued under it.127


Author Contact Information

Kate M. Manuel

Legislative Attorney
kmanuel@crs.loc.gov, 7-4477



121 48 C.F.R. §16.702(a) (basic agreement); 48 C.F.R. §16.703(a) (basic ordering agreement). However, an agreement
could potentially be a contract when consideration and mutuality of assent are present. See, e.g., Almar Indus. Inc. v.
United States, 16 Cl. Ct. 243 (1989); 2-19 Gov't Cont.: L., Admin. & Proc. §19.170; see also CRS Legal Sidebar
WSLG919, Certain Blanket Purchase Agreements Are Not Binding Contracts, Federal Circuit Finds, by Kate M.
Manuel.
122 See 48 C.F.R. §16.702(b)(1) (basic agreements). These terms must include (1) the clauses required for negotiated
contracts by statute, executive order, and the FAR and (2) any other clauses prescribed by the FAR or agency
regulations that the parties agree to include. Id.
123 See 48 C.F.R. §16.703(c)(1) (basic ordering agreements). These terms must (1) describe the method for determining
prices to be paid to the contractor for supplies or services; (2) include delivery terms or conditions, or specify how they
will be determined; (3) list one or more procuring activities authorized to issue orders under the agreement; (4) specify
the point at which an order becomes a binding contract (e.g., issuance, acceptance); (5) provide that failure to reach
agreement on price for any order issued before price is established is a dispute under the “disputes clause;” and (6)
include any special data required when “fast payment” procedures will apply to orders. Id.
124 48 C.F.R. §16.702(a).
125 48 C.F.R. §16.703(b).
126 48 C.F.R. §16.702(b)(3) (basic agreements); 48 C.F.R. §16.703(c)(2) (basic ordering agreements).
127 Id.
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Acknowledgments
CRS Legislative Attorney Carol J. Toland contributed to an earlier version of this report.

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