Every solicitation picks a contract type before it picks a winner, and the type answers one question that matters more than almost anything else in the paperwork: if the job costs more than planned, whose money covers the difference. FAR Part 16 lays out the menu. Here is what small businesses actually run into.
Firm fixed price
You quote one price for the defined work, and that price does not move once the contract is signed, no matter what it actually costs you to deliver. Come in under budget and you keep the difference. Run over, and you absorb it. This is the type the government reaches for most often, because it caps the agency's exposure and hands the estimating risk to you. It rewards a business that knows its true costs cold, and it punishes one that is guessing.
Time and materials
You bill for labor hours at fixed hourly rates, plus the cost of materials, usually against a ceiling the contract will not let you exceed. The hourly rate you quote is typically a loaded rate, often called a wrap rate: your labor cost plus overhead and profit rolled into one number. Risk here is shared. The government is protected by the ceiling, and you are protected from having to guess total scope up front, since you get paid for the hours the work actually takes, within that cap.
Labor hour
A close cousin of time and materials, minus the materials. You are paid a fixed hourly rate by labor category, and nothing else moves. It shows up most often on services work where the deliverable is expertise and time, not parts.
Cost reimbursement
The government pays your allowable costs as you incur them, plus a fee on top. It sounds friendlier than fixed price, since you are not stuck eating an overrun, but it is rare for a newcomer to see one, and rarer still to win one. It asks for something most new businesses do not have yet: an accounting system the government has reviewed and approved in advance, one that can track indirect rates, the overhead and general and administrative percentages layered on top of direct costs, and defend them on request. That accounting burden, not the paperwork of any single proposal, is what keeps most small businesses out of this lane until they have grown into it.
What each one asks of you
| Type | Who absorbs a cost overrun | What it demands from you |
|---|---|---|
| Firm fixed price | You | An accurate cost estimate, made once, up front |
| Time and materials | Shared, up to the ceiling | An honest wrap rate and hours you can defend |
| Labor hour | Shared, up to the ceiling | Accurate labor categories and rates |
| Cost reimbursement | Mostly the government | An approved accounting system, tracked continuously |
Which ones you will actually see first
Firm fixed price is where most small businesses start and stay, especially on supplies and well-defined services, because it asks for a cost estimate rather than an accounting infrastructure. Time and materials and labor hour show up often on services contracts where the scope is real but hard to pin down in advance. Cost reimbursement is worth knowing about so you recognize it when you see it, but treat it as a later-stage lane, one to grow into once your books can pass the review that comes with it.
None of this decides whether a specific notice is worth bidding. It decides what you are agreeing to carry if you win it, and that is worth knowing before you price anything.