Cost-Plus Fixed-Fee Contract (CPFF)

A Cost-Plus Fixed-Fee (CPFF) contract reimburses the contractor for all allowable, allocable, and reasonable costs incurred during performance, plus a fixed fee (profit) established at contract award that does not increase or decrease based on actual costs.

What is a Cost-Plus Fixed-Fee Contract?

CPFF is defined in FAR 16.306. It is the most commonly used cost-reimbursement contract type, particularly for research and development, exploratory work, and acquisitions where the scope of work is not well enough defined to support a fixed price.

Key characteristics of CPFF:

• Government bears cost risk: the government reimburses all allowable costs, regardless of whether actual costs exceed estimates. The cost ceiling (estimated cost/obligated amount) limits the government's exposure in practice, but the contractor can request increases.
• Fixed fee: the contractor's profit is established as a fixed dollar amount at award. The fee does not change based on whether the contractor is efficient or inefficient, overruns or underruns the cost estimate.
• Cost accounting required: contractors must have a DCAA-compliant accounting system and comply with Cost Accounting Standards (for larger contracts)
• Allowable cost rules: FAR Part 31 governs which costs can be reimbursed; unallowable costs (entertainment, certain marketing expenses, executive compensation above caps) cannot be charged to a government cost-plus contract
• No cost ceiling on obligations: if the contractor reaches the estimated cost ceiling before completing the work, they must notify the government and cannot continue incurring costs above the ceiling without a modification increasing the ceiling

Two subtypes exist:

• CPFF Completion: a specified end product; the contractor must complete the defined work within the estimated cost or seek additional funding
• CPFF Term: a defined level of effort for a specified time period; the contractor delivers the work performed within the time limit regardless of what is completed

Why CPFF matters for government contractors

CPFF is the primary contract type for research, advanced technology development, and complex service contracts where scope is truly uncertain. Because the government absorbs cost risk, the fee is lower than profit on comparable fixed-price work, typically 6-8% of estimated cost for research, compared to 10-15%+ on firm-fixed-price work. However, CPFF provides cash flow certainty (costs are reimbursed monthly as incurred) and protects against financial loss when requirements change. The compliance burden is significant: contractors must maintain a DCAA-approved accounting system, comply with timekeeping requirements, and submit incurred cost proposals annually. This compliance infrastructure has significant ongoing cost. See our guide on DCAA-compliant accounting for details.

Example

DARPA awards a CPFF contract for basic research on quantum sensing. The estimated cost is $4.5M with a fixed fee of $315,000 (7%). The contractor conducts the research, incurring actual costs of $4.2M over the two-year performance period. They invoice monthly for actual costs plus a pro-rata share of the fee. Total government payment: $4.2M + $315,000 = $4.515M. If the research required more work than anticipated and costs ran to $4.8M before work was complete, the contractor notifies the government at $4.2M (75% of ceiling) per contract terms. The government evaluates whether to increase the ceiling. If not, the contractor stops work at the cost ceiling.

Frequently Asked Questions

What is the maximum fee on a CPFF contract?

FAR 15.404-4(c)(4)(i) caps fees on CPFF contracts at 15% of estimated cost for research and development and 10% for other cost-plus fixed-fee contracts. These caps prevent the government from paying excessive fees on cost-reimbursable work.

Does the fixed fee change if the estimated cost changes?

The fee is fixed in dollars, not as a percentage. If the government increases the estimated cost through a modification, the fee may or may not increase, this is a negotiation. Some modifications increase only the estimated cost; others increase both cost and fee proportionally. The specific modification terms govern.

What is a DCAA-compliant accounting system?

A DCAA-compliant accounting system is one that separates direct costs from indirect costs, accumulates costs in a way that allows allocation to specific contracts, ensures only allowable costs are charged, and supports an audit trail. DCAA pre-award surveys assess whether a contractor's accounting system is adequate before awarding cost-plus contracts. Without a compliant accounting system, a company cannot be awarded cost-reimbursable contracts.

Can a small business get a CPFF contract?

Yes. Small businesses can receive CPFF contracts if they can demonstrate a compliant accounting system. The compliance burden (accounting system setup, timekeeping, indirect rate calculation) is one of the primary barriers for small businesses to accessing the cost-plus market. Many small businesses find it worthwhile to invest in the infrastructure to access larger R&D and advanced development contracts.