Fixed Price (FP) or Firm Fixes Price (FFP)
Also called “Lump Sum,” FP or FFP is the simplest type of contract, often used in governmental contracting. This type of contract allows the owner to specify the work and the contractor to give a price, assume almost all of the risk and, as a result, reap whatever profit there is.
Time and Materials
T&M. Simple billing at pre-negotiated rates for labor and materials on a project; all risk goes to the owner. Some Fixed Price contracts specify T&M as a method for determining costs of change orders. Labor rates include a certain percentage markup for overhead.
For example, a catering contract can state a per hour rate for serving food and a per item rate for the purchase of food. The client can set a maximum amount and the vendor warns the client when the limit is about to be met. It is a common contract method in construction projects.
Cost Plus Fixed Fee (CPFF)
CPFF or sometimes just “Cost Plus.”
A CPFF contract shifts most of the risk to the owner, but also allows the owner a high degree of flexibility. The contractor under this form of contract has profit at risk and will seek to minimize cost/duration to return a higher proportional profit margin. This type of contract is more common on projects which have high amounts of risk and uncertainty which would scare contractors into giving impossibly high bids, or where the owner just needs resources to work on a project.
The “fixed fee” is typically a percentage of estimated costs and the contractor is reimbursed for other allowable costs; the total amount of the fee is decided in advance based on estimates.
Cost Plus Percentage of Costs (CPPC
CPPC is similar to the Cost Plus Fixed Fee (CPFF) contract except that the contractor bears even less risk and their fee is calculated based on a percentage of actual costs. It is generally believed that having a fee at risk is a motivating factor for contractors, so this approach is not allowed for federal government contracts (though there may be loopholes…?) It is very similar to T&M. Good work if you can get it.
Cost Plus Incentive Fee (CPIF)
CPIF uses an incentive fee for motivating better performance (than Cost Plus Fixed Fee (CPFF) or Cost Plus Percentage of Costs (CPPC)). In addition to a fee, an incentive is paid for beating a schedule or cost target. Like having the fee at risk, CPIF is intended to motivate the contractor to minimize costs and duration. Determining the appropriate incentive is one difficulty, another is that once the target has been missed, the incentive is no longer a motivating factor. Often the incentive fee is calculated as a percentage of savings and is shared by the owner and the contractor.
Fixed Price Incentive Fee (FPIF)
Similar to Fixed Price (FP) but with an incentive fee. Motivation to perform is the reason.