Contract type is a negotiated choice. The FAR says selecting the contract type is generally a matter for negotiation and requires the exercise of sound judgment 1.
A firm-fixed-price contract provides a price that is not subject to any adjustment on the basis of the contractor's cost experience in performing it 2. If your costs run over, the price does not move.
Cost-reimbursement contracts provide for payment of allowable incurred costs, to the extent the contract prescribes 3. Time-and-materials contracts pay for direct labor hours at fixed hourly rates that include wages, overhead, general and administrative expenses and profit 4.
Neither type removes all of your risk. A cost-reimbursement contract establishes an estimate of total cost and a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer 5. A time-and-materials contract includes a ceiling price that the contractor exceeds at its own risk 6.
Worked example. Contractor E prices a help-desk job three ways: a fixed monthly price, a cost-plus estimate and loaded hourly rates. It bids the fixed price only after its historical ticket data supports the staffing level.
Indented paragraphs are invented worked examples. Tool links open Bids2Bank and need a free account.
Next lesson: How price is evaluated, and what "reasonable" means