The Different Types of Government Contracts
Without an understanding of the different types of government contracts, you can easily miss out on incredible profit opportunities! An opportunity’s contract type will determine your:
- Contractual liabilities and assurances while supporting the government contract
- Pricing strategies to ensure profitable, yet competitive, proposal pricing
- Staffing strategies and various employee incentives to support the government contract
Prime Government Contracts vs Subcontracts
Possessing either a subcontract or a prime contract are the only two ways to make money in the Federal Government contracting industry. However, that is where the similarities end.
Prime Government Contracts
A type of government contract directly between the government and a business (even 1-person businesses!) is a prime contract. The prime contractor is the single business that undersigns the submitted proposal in response to the RFP. Although a prime contractor may legally issue subcontracts for up to 49% of the work, they are 100% responsible for the successful execution of this type of government contract.
A subcontract is an agreement between the prime contractor, who led the proposal effort and was awarded the government contract, and an industry partner. For this type of government contract arrangement, prime contractors issue sub-contracts to industry partners for the following reasons: (1) To provide abilities and qualifications required by RFP that the prime contractor does not possess, (2) To obtain “customer insights” to improve the competitiveness of the bid, and (3) To meet RFP-required small business contracting goals.
Main Types of Government Contracts (Prime Contracts)
The most common types of government contracts include: (1) time & material contracts, (2) cost-plus fixed fee (or cost-reimbursement) contracts, and (3) fixed-price contracts.
Time and Material Type of Government Contract
Time and material contracts are mainly used by the Federal Government when they need a service performed or staff augmentation. These types of government contracts do not stress a defined deliverable such as “build an enterprise readiness database with the following capabilities…” Instead, this type of government contract pays the prime contractor a negotiated hourly rate for every hour worked by labor category. A labor category is a qualification level. For example, a Senior Database Administrator category may require an individual to have 15 years of experience and a bachelors degree in a STEM field.
Cost-Plus Fixed Fee Type of Government Contract
Cost-plus fixed fee contracts require that you show your “books” to the Federal Government to prove your actual costs performing the contract. These types of government contracts are typically used when the government is asking a contractor to do something that is either incredibly difficult or relatively undefined. Here, the government is concerned that most contractors will either not accept the risk of possibly losing money on an extremely difficult or ill-defined task, or they are concerned that they may be fleeced by the contractor by over-estimating the complexity of the tasking. So, these types of government contracts pay the contractors’ actual costs to perform the work, plus a negotiated “fee” or profit on top of their costs.
Firm-Fixed Price Type of Government Contract
Firm-fixed Price contracts is a simple contract that states the contractor will complete contract requirements at a negotiated price, that will not change. For these types of government contracts, a prime contractor’s fixed price is listed in your awarded, stating that you will complete the contract requirements for that price, no matter what happens. These types of government contracts put all risks on the prime contractor, but they cannot also be the most profitable.
Government Contracts with Mandatory Subcontracting Plans can be a Great Starting Point!
A popular and profitable business strategy for small business growth is pursuing government contracts that have subcontracting plans. These types of government contracts are very large and require subcontracting plans to be submitted as part of a large company’s proposal. To enforce compliance for these types of government contract, subcontracting plans are evaluated during award determination. Typically, 25% to 40% of requirements for these types government contracts must be performed by small businesses. To be successful using this growth strategy, you must identify the decision-makers for large business bidders. Let Government Contracting Academy show you insider secrets to identify the decision-makers who make these subcontracting plans!
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About Randy Wimmer
Randy’s first Federal Government contracting company was launched from his home after his kids went to bed. He later sold it for 8-figures. With nearly thirty years either in or supporting the Federal Government, Randy is the ultimate “industry insider,” having owned multiple successful contracting companies.