Private companies may be eligible to receive many different types of government contracts, many of which can become lucrative over time. These contracts are categorized according to the financial arrangements that a particular contract involves. The major categories of government contracts include fixed-price contracts, cost-reimbursement contracts, time-and-materials (T&M) contracts, and letter contracts.
In a fixed-price contract, the government pays out a set price when the contractor completes a certain task. Payment may not come until an entire project is complete, or may come periodically as the project moves through different stages of completion. This type of contract places some degree of financial risk on the contractor, but may be profitable due to the contractor’s ability to control the pace of the work.
Cost-reimbursement contracts do not have fixed prices for the completion of a project or a task within the project. Instead, contractors issue invoices to the government on a regular basis in order to cover their costs as they accrue during a particular project. The terms of a cost-reimbursement contract may vary with respect to the timing of invoices and any limitations on costs.
T&M contracts provide the least risk to the contract involved. The government simply purchases the labor of a contractor at a specific, negotiated rate. In other words, the government pays the contractor on an hourly or otherwise incremental basis for his labor. The T&M contract may set forth a maximum number of hours for a specified task, and the contractor will bill against the contract accordingly. This type of contract allows the contractor to receive payment as his work progresses rather than putting forth the work without payment until the end of the project.
The government typically uses a letter contract in only the most urgent circumstances to allow a contractor to commence work immediately. This type of government contract places a great deal of liability on the government. Since the contract usually estimates the price of the project completion from the outset, there is little control over the ultimate costs of the contract.
Each of these main categories of government contracts contains variations as well. Some contracts add on incentive fees for contractors who complete tasks or projects within a certain timeframe or under a specified cost level. These types of government contracts allow the contractor to earn additional money for work completed earlier than expected.