Cost-Plus-Fixed-Fee (CPFF)
A Cost-Plus-Fixed-Fee (CPFF) contract is a type of cost-reimbursement contract in which the contractor is reimbursed for all allowable incurred costs and receives a fixed fee established at the time of contract award. The fixed fee does not vary based on actual cost performance — it remains constant regardless of whether the contractor spends more or less than originally estimated.
What Is a Cost-Plus-Fixed-Fee (CPFF) Contract?
A Cost-Plus-Fixed-Fee (CPFF) contract is a type of cost-reimbursement contract in which the contractor is reimbursed for all allowable incurred costs and receives a fixed fee established at the time of contract award.
The fixed fee does not vary based on actual cost performance. It remains constant regardless of whether the contractor spends more or less than originally estimated.
CPFF contracts are governed by Federal Acquisition Regulation Part 16.306, which defines CPFF contracts and outlines when they are appropriate.
Key Characteristics of a CPFF Contract
CPFF contracts are common in R&D projects, engineering development, exploratory studies, and prototype efforts where requirements cannot be precisely defined and technical uncertainty exists.
Allowable Costs
Reimbursable costs must be allowable, allocable, and reasonable under FAR Part 31 cost principles. Examples include direct labor, materials, indirect costs such as overhead and G&A, and authorized travel. Unallowable costs are not reimbursed.
Fixed Fee
The fixed fee is negotiated at contract award, does not change based on actual cost performance, and represents the contractor's profit. The fee may be paid incrementally as work progresses.
Cost Reimbursement Structure
The government reimburses the contractor for actual incurred allowable costs, subject to funding limitations, audit review, and contract ceilings. If costs increase beyond funding limits, additional funds must be obligated before work continues.
Completion Form
Used when the scope is clearly defined. The contractor must complete specified work and the fee is tied to completion of the defined effort.
Term Form
Used when the scope is uncertain. The contractor provides a specified level of effort for a fixed time and the fee is earned upon delivering the agreed level of effort.
Regulatory Framework
CPFF contracts are governed by:
Federal Acquisition Regulation Part 16.306, which defines CPFF contracts and appropriate use
FAR Part 31 Cost Principles, which govern allowability of incurred costs
Defense Contract Audit Agency (DCAA) audit standards for cost-reimbursement contracts
Why CPFF Matters for Contractors
For the government, CPFF encourages innovation, enables work under uncertainty, and reduces contractor cost risk. For contractors, CPFF provides lower financial risk on cost overruns and a stable predetermined profit. However, contractors must maintain strong accounting systems because costs are subject to audit, detailed documentation is required, and billing must comply with federal standards.
If actual allowable costs total $5.5 million on a $5M estimated contract, the contractor receives reimbursed costs plus the full fixed fee
If actual costs are only $4.8 million, the contractor still receives the full fixed fee — it does not fluctuate
Audits are often conducted by the Defense Contract Audit Agency
For example, on a federal AI research contract with a $5 million cost estimate and $400,000 fixed fee, the contractor receives the full $400,000 fee regardless of whether actual allowable costs come in above or below the estimate — as long as costs are allowable and within obligated funding.
Common Misconceptions About CPFF
CPFF guarantees high profits.
The fee is fixed and does not increase with higher spending.
Contractors can spend freely under CPFF.
Costs must be allowable, allocable, reasonable, and within funding limits.
CPFF involves low oversight.
Cost-reimbursement contracts often involve heavy oversight and audit scrutiny.
Frequently Asked Questions
Can the fixed fee be adjusted?
Generally no, unless the scope of work changes significantly through a contract modification.
What happens if the project overruns funding?
Work must stop unless additional funds are obligated by the government.
Is CPFF better than fixed-price?
It depends on project risk. CPFF is better suited for uncertain work; fixed-price is preferred for well-defined requirements.
Related Government Contracting Topics
Cost-Plus-Incentive-Fee (CPIF): A cost-reimbursement contract where the fee varies based on cost performance against targets.
Cost-Plus-Award-Fee (CPAF): A cost-reimbursement contract where fee is based on subjective performance evaluations.
Firm-Fixed-Price (FFP): A contract type where the price is set at award and does not change regardless of actual costs.
Time-and-Materials (T&M): A contract type that pays for labor at fixed hourly rates plus actual material costs.
Cost Accounting Standards (CAS): Standards governing consistency in cost accounting practices for government contractors.
Cost-Plus-Fixed-Fee contracts are foundational tools in federal acquisition, particularly for complex and uncertain projects. They balance risk between the government and contractor while enabling innovation in areas where precise cost prediction is not feasible. Understanding CPFF mechanics is essential for any contractor pursuing cost-reimbursement work.