Government Contract Types: Cost-Plus, Firm Fixed-Price, and T&M from an Accounting Perspective

The contract type a government award is priced under determines almost everything about the accounting and audit burden that comes with it, far more than the size of the contract or the agency awarding it. A $2 million cost-plus-fixed-fee contract carries more DCAA audit exposure than a $20 million firm-fixed-price award. Understanding how FAR Part 16 contract types differ, from an accounting standpoint rather than a legal one, shapes which contracts a contractor should pursue given the maturity of its own accounting system.

How does cost-reimbursement contracting carry audit risk?

Cost-reimbursement contracts, principally cost-plus-fixed-fee (CPFF, FAR 16.306), cost-plus-incentive-fee (CPIF, FAR 16.405-1), and cost-plus-award-fee (CPAF, FAR 16.405-2), pay the contractor its allowable, allocable, and reasonable costs under FAR 31.201-2, plus a fee. The fee structure differs (fixed, tied to a cost/performance incentive formula, or tied to a subjective performance evaluation), but the cost reimbursement mechanism is the same across all three, and it is that mechanism that drives the audit exposure.

• Every dollar billed under a cost-reimbursement contract is, in principle, auditable. The contractor bills provisional rates during the year and reconciles to final rates afterward.
• Cost-reimbursement contracts carry the FAR 52.216-7 clause, which obligates the contractor to submit an annual incurred cost submission within six months of fiscal year end, covered in detail in the guide on the DCAA incurred cost submission.
• DFARS 252.242-7006 system adequacy requirements attach to cost-reimbursement contracts specifically. A cost-plus award is the contract type most likely to trigger a pre-award survey for a contractor without a recent adequacy determination.
• Because every cost is subject to audit, cost-plus is also where the FAR 31.205 unallowable cost exposure is most acute. A cost that slips through on a cost-plus contract is a direct government billing; the same cost on an FFP contract simply reduces the contractor’s own margin.

How does firm fixed-price work, and when does CAS apply?

Firm-fixed-price contracts (FAR 16.202) pay a fixed amount regardless of the contractor’s actual cost to perform. The contractor bears the cost risk, and in exchange the government generally does not require the ongoing cost disclosure that a cost-plus contract does.

• No FAR 52.216-7 clause, generally no incurred cost submission. Because the government is not reimbursing actual costs, there is no annual rate true-up requirement.
• The exception that matters: an FFP contract awarded without adequate price competition, above the certified cost or pricing data threshold, still requires the contractor to submit certified cost or pricing data at the proposal stage under the Truthful Cost or Pricing Data Act (TINA). As of mid-2026, that threshold is $10 million for DoD contracts entered into after June 30, 2026 under 10 U.S.C. 3702, while the FAR text for civilian agency contracts still reflects the older $2.5 million figure as of this writing. Crossing that threshold on a non-competed FFP proposal triggers a DCAA forward pricing audit of the proposed costs and rates, and exposes the contractor to a defective pricing claim after award if the submitted data was not accurate, complete, and current.
• CAS can still apply to a large FFP award that is not for a commercial product or service and was not awarded on the basis of adequate price competition, based on the CAS applicability thresholds covered in the guide on Cost Accounting Standards. CAS coverage and the FFP pricing mechanism are separate questions; a fixed price does not exempt a contract from CAS.
• FFP contracts for commercial products or services, and FFP contracts awarded with adequate price competition, are the lowest-exposure category overall. No certified cost or pricing data, no CAS coverage, and no incurred cost submission.

How does time-and-materials work, and what does DCAA test?

Time-and-materials and labor-hour contracts (FAR 16.601) bill at fixed, negotiated labor rates multiplied by actual hours worked, plus materials at cost, up to a stated ceiling. The government absorbs the risk on total hours (up to the ceiling), while the contractor’s rate is fixed by contract rather than tied to its actual indirect cost structure the way a cost-plus rate is.

• Labor category verification is the primary audit focus. DCAA checks whether the person actually performing the work meets the qualifications of the labor category billed. Billing a “senior engineer” rate for work performed by a junior staff member is the T&M equivalent of a labor mischarging finding.
• Timekeeping is still required, and still audited, the same daily-entry and supervisor-approval requirements covered in the guide on DCAA timekeeping apply, because the government needs to verify that billed hours were actually worked.
• Material costs need documentation, at actual cost or an established catalog or market price, the same substantiation standard that applies to materials on a cost-plus contract.
• There is no annual indirect rate reconciliation the way a cost-plus contract requires, because the labor rate is fixed by contract rather than computed from actual indirect costs each year. That said, if the fixed rates were built using the contractor’s provisional indirect rates at proposal time, a significant divergence between those provisional rates and the contractor’s eventual actual rates can still surface as a pricing or negotiation issue on the next T&M proposal.

Which contract type creates the most DCAA audit exposure?

Ranked from highest to lowest exposure, based purely on the accounting and audit burden each contract type imposes:

• CPFF, CPIF, CPAF (highest). Full annual incurred cost audit exposure, mandatory ICS, full indirect rate reconciliation, and the broadest FAR 31 allowability exposure since every dollar is a government reimbursement.
• T&M/LH (moderate). Labor category and rate verification, timekeeping audit, material cost substantiation, but no annual ICS or indirect rate reconciliation tied to actual costs.
• FFP above the cost/pricing data threshold, awarded without adequate competition (moderate, front-loaded). Forward pricing audit exposure and defective pricing risk at the proposal stage, but no ongoing incurred cost audit after award.
• FFP for commercial items, or awarded with adequate price competition (lowest). Generally no CAS coverage, no certified cost or pricing data requirement, and no incurred cost submission.

How does revenue recognition differ by contract type?

Contract type also shapes how revenue is recognized for financial statement purposes under ASC 606, a separate question from FAR or CAS audit exposure but one that affects the same underlying data.

• Cost-reimbursement and T&M contracts typically recognize revenue over time, using an input method (costs or hours incurred as a measure of progress toward completion), because the government controls the deliverable as it is created and the contractor has a right to payment for performance completed to date.
• FFP contracts can also qualify for over-time recognition if the contract meets the ASC 606-10-25-27 criteria (no alternative use for the asset created, and an enforceable right to payment for work performed), which is common for FFP services contracts. FFP contracts for distinct, deliverable-based production work, where the criteria for over-time recognition are not met, recognize revenue at the point each deliverable transfers instead.
• The GAAP revenue recognition question and the FAR/CAS audit exposure question are independent of each other. A contract can qualify for over-time revenue recognition on the financial statements while carrying minimal DCAA audit exposure, if it is an FFP award for commercial services, for example.

How does risk allocation shape which contract to pursue?

Contract type is, at its core, a decision about who bears the risk of a cost overrun, and that decision should factor into which contracts a contractor with a still-developing accounting system chooses to pursue.

• Cost-plus puts cost overrun risk on the government (within the funded ceiling, and minus any disallowed or questioned costs), but demands the most mature accounting system and carries the highest compliance overhead. A contractor without a DCAA-adequate system is taking on real risk by bidding CPFF work, because a system adequacy finding can delay award or trigger payment withholding under DFARS 252.242-7006.
• FFP puts cost overrun risk on the contractor, who eats any overrun out of its own margin, but demands far less ongoing compliance overhead, assuming the award is either commercial or competitively priced.
• T&M splits the risk: the government is protected against a rate overrun (the rate is fixed), while the contractor’s profit is fixed per hour billed regardless of its actual cost to deliver that hour, so the contractor’s risk is in managing its own cost to stay under the negotiated rate.

What should I do next?

Contract type should factor into a contractor’s bidding strategy as directly as price and technical fit do, especially for a business whose accounting system is still maturing. Pursuing FFP and T&M work first, while building toward the accounting maturity a cost-plus contract demands, is a defensible sequencing strategy, not a missed opportunity.

• DCAA compliant accounting system requirements, the adequacy standard that attaches specifically to cost-reimbursement contract types
• DCAA incurred cost submission, the annual obligation that comes with every cost-plus award
• Cost Accounting Standards applicability, how CAS coverage can attach to a large FFP award independent of the pricing mechanism
• Setting up as a small government contractor, building the system that eventually supports a first cost-plus bid

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.