Federal Contract Types for Software Companies: Fixed-Price, T&M, Cost-Type and IDIQ
By Philip Luca — Founder of GovExpress; prior domain experience at Bloomberg Government and GovWin IQ.
A federal contract tells you more than what the government is buying. It also tells you how the price works: who carries the risk if the work costs more than expected, what records you have to keep, and how the agency will place orders. That’s the contract type, and it shapes your margin, your paperwork and sometimes whether you can bid at all.
Most software companies only ever meet two or three contract types. This guide covers the ones you’re likely to see, how commercial software is usually bought, and what each type asks of a seller.
Where the rules live
The Federal Acquisition Regulation sets out contract types in FAR Part 16. They sit on a spectrum. At one end, fixed-price contracts put the cost risk on the contractor: you agree a price and deliver for it. At the other end, cost-reimbursement contracts put more of the risk on the government: it pays allowable costs plus a fee. Time-and-materials and labor-hour contracts sit in between.
FAR Part 16 also covers the indefinite-delivery contracts, including IDIQ, that agencies use to set up a contract once and then place orders against it. Those are less a pricing method than a way of structuring how orders are placed, and each order still has its own pricing type.
How commercial software is usually bought
If your product is sold commercially, the government will usually buy it as a commercial product or service under FAR Part 12. That matters for contract type. For commercial acquisitions, FAR Part 12 directs agencies to use firm-fixed-price contracts or fixed-price contracts with economic price adjustment. Time-and-materials and labor-hour contracts are allowed for commercial services only in limited circumstances, and cost-reimbursement contracts aren’t used for commercial acquisitions.
In practice, that means a SaaS subscription, a perpetual license or a support plan is almost always priced as a fixed price per unit: per user, per seat, per instance or per year. If you sell commercially, expect your federal pricing to look like your commercial price list, with the discounts and terms the buyer negotiates.
The main contract types
- Firm-fixed-price (FFP). You deliver the defined product or service for a set price, regardless of what it costs you. This is the default for software licenses and subscriptions. It suits a company with predictable costs, and it carries the least administrative burden, because the government doesn’t audit your costs to decide what to pay.
- Fixed-price with economic price adjustment. A fixed price that can move up or down based on a defined factor, such as published price lists or an index. It shows up on multi-year agreements where prices may change over the term.
- Time-and-materials (T&M) and labor-hour. The government pays fixed hourly rates for labor categories, plus materials at cost for T&M, up to a ceiling price. These are common for implementation, integration and support services when the scope can’t be fixed in advance. The contracting officer has to justify why no other type is suitable, and the ceiling is a hard limit: work past it is at your own risk unless the contract is modified.
- Cost-reimbursement. The government pays allowable, allocable and reasonable costs plus a fee, up to an estimated ceiling. These are used for research, development and other work where the cost can’t be estimated well. They require an accounting system adequate for determining costs on the contract, and the government can audit what you bill. Software companies usually meet them through research and development work, including some SBIR awards, rather than through product sales.
Many contracts combine types across line items. A single award can price the software subscription as FFP and the onboarding services as T&M.
IDIQ contracts and task orders
An indefinite-delivery, indefinite-quantity contract, or IDIQ, sets the terms and a minimum and maximum quantity but leaves the specific work to later orders. The agency then issues task orders for services or delivery orders for products as the need comes up. Each order carries its own contract type, and for software that’s usually fixed-price.
IDIQs can be single-award, with one contractor, or multiple-award, where several contractors hold the same vehicle and compete for each order under the fair opportunity rules in FAR Part 16. Governmentwide vehicles such as a GWAC or SEWP work in a similar way. A company that doesn’t hold the vehicle can’t receive orders under it directly, which is why many software companies sell through a reseller or prime that does. Our guides to contract vehicles and teaming and subcontracting cover those routes.
A related arrangement is the blanket purchase agreement, or BPA, which agencies often set up under a GSA Schedule to simplify repeat purchases. Orders under a BPA are also typically fixed-price for software.
One point that often causes confusion: the ceiling on a multi-award IDIQ is the maximum the government may order across every holder over the life of the vehicle. It isn’t what any one holder will receive, and adding up ceilings across holders overstates the market many times over.
Option periods and term length
Federal contracts are funded from annual appropriations, so multi-year software deals are usually written as a base period plus option periods under FAR Part 17, often a base year and several option years. The agency decides each year whether to exercise the next option. It isn’t obliged to, so a five-year deal on paper is a one-year commitment followed by renewals.
For services contracts, FAR Part 17 generally limits the base and option periods together to five years unless an exception applies. Plan your pricing, including any annual increases, across the whole term at the start, because changing it after award takes a contract modification.
What each type asks of you
- Pricing discipline. Fixed-price work rewards a company that knows its costs. Underprice an implementation and the loss is yours.
- Records. T&M and labor-hour contracts require timekeeping that supports every hour billed. Cost-reimbursement contracts go further, with cost accounting and audit exposure.
- Compliance that travels with the contract. Security clauses apply whatever the pricing type. On Department of War work involving CUI, DFARS 252.204-7012 and CMMC requirements apply, and cloud products may need FedRAMP authorization or an agency ATO. What a company reports about itself is self-attested. Buyers increasingly look for an assessment or authorization they can verify.
For most software companies the answer is simple: sell the product at a fixed price, price services carefully if you offer them, and leave cost-type work for R&D funding you pursue on purpose.
To see how ready your company looks to federal buyers before you price your first deal, score your company’s federal readiness.
Related reading
The CMMC brief
What the Phase 2 suspension changed and what it did not — the obligations that still bind, the assessment path a contract puts you on, the scoping decision that drives the cost, and the sequence that fits inside a pipeline. Sourced from the primary record.