Cost-Reimbursable vs. T&M vs. Firm Fixed Price

The same wrap rate sits behind all three common government contract types. What changes is who checks it, how closely, and when.

The three common government contract types all use your rate, but they use it differently. On a cost-reimbursable contract, the government reimburses your costs plus a fee, so your indirect rates drive what you get paid and face the most scrutiny. On a Time and Materials (T&M) contract, you bill a fixed hourly rate for uncertain hours, so the rate itself is the deal. On a firm fixed price contract, you commit to a total price, and the government does not ask how you built the number, though you still need it to avoid a loss. This is drawn from our DCAA Ready webinar series, presented by Brian Wendroff, CPA, Co-founder of WiseCost and Managing Partner at Wendroff & Associates, CPA, and Paul Calabrese, a former DCAA auditor.

The three contract types at a glance

Contract type	How you get paid	Does it ask for your rate?	Audit exposure
Cost-reimbursable (CPFF, CPAF, SBIR Phase II)	Reimbursed for allowable costs, plus a fee	Yes, through your indirect rates	Highest
Time and Materials (T&M, GSA multiple award schedules)	Fixed hourly rate times hours worked	Yes, directly	Moderate
Firm fixed price (FFP, SBIR Phase I)	One agreed price for the defined scope	Not required, but you need it	Lowest

Cost-reimbursable: your rates are the payment

On a cost-reimbursable contract, the government pays you back for the allowable costs of performing the work, then adds a fee. Because you are reimbursed based on your actual direct and indirect costs, those indirect rates are not just a pricing tool; they are the mechanism you get paid through.

That is why this contract type carries the most oversight. A cost-reimbursable award commonly triggers a DCAA review of your accounting system against the SF-1408 checklist, to confirm the system can segregate costs and produce reliable rates. Later, after performance, the government settles your final indirect rates through an incurred cost submission. For what the pre-award review checks, see the DCAA pre-award accounting system review and what is the SF-1408.

Time and Materials: the rate is the whole deal

On a T&M contract, you bill an agreed hourly rate for each labor category, multiplied by the hours actually worked. The government knows the value of an hour but not how many hours the job will take, which is why T&M is treated as requiring more oversight than fixed price.

Two things follow. First, your fully loaded rate is exactly what you bill, so building it correctly is not optional. Second, T&M contracts require you to track time by employee and project, because your invoices have to be supported by traceable labor records. Weak timekeeping is a fast way for a T&M contractor to get into trouble. See DCAA timekeeping requirements.

GSA multiple award schedules often sit here too. Contractors develop hourly rates, and the agency may then lock estimated hours and convert the effort to fixed price.

Firm fixed price: no one asks, but you still need the number

On an FFP contract, there is one agreed price for a defined scope. You perform the work for that amount no matter what it costs you. The government does not require you to show how you built the price, and there is usually no after-the-fact cost audit.

That freedom is also the trap. Because no one checks your math, a founder who priced from salary and forgot the indirect load can win the work and lose money on every hour. You need the same wrap rate here as anywhere else; you just need it for yourself. The government often chooses fixed price precisely because a smaller contractor may not track labor as tightly, so it shifts the risk onto you.

"Give me an hourly rate, we'll give you the hours, we'll put it on you to do it."

Paul Calabrese, a former DCAA auditor, on why the government favors fixed price with smaller contractors

The rate is the same; the risk is not

Whatever the contract type, the wrap rate comes from the same place: direct labor plus fringe, overhead, and G&A, with fee on top. In our worked example, that is $50.00 of labor becoming $107.38 of cost and a $115.97 bid rate. The build does not change with the contract type. For the full walkthrough, see how to build rates that win government contracts. Figures are illustrative, not benchmarks.

What changes is your exposure. Cost-reimbursable means the government audits how you got the number. T&M means the number is what you bill, so it has to be defensible and backed by clean time records. FFP means no one checks, so the discipline has to come from you.

Build once, defend anywhere

WiseCost keeps the same rate engine behind every contract type: timekeeping that ties each hour to a contract or an indirect pool, labor distribution posted to QuickBooks Online with an immutable audit trail, and indirect rate reports you can hand to an auditor. Whether you are on T&M today and eyeing a cost-reimbursable SBIR Phase II tomorrow, the system is ready.

FAQ

Cost-reimbursable work generally carries the most. Because the government pays your actual costs, it commonly reviews your accounting system (often against the SF-1408 criteria) and settles your rates later through an incurred cost audit. How much scrutiny you actually see still depends on the agency, the contract, and whether you are the prime.

Not always for the government's sake, but you need to know your costs to price it. On T&M and cost-reimbursable work, time tracking by project is required.

When the scope of hours is uncertain, T&M lets the government fix the rate while the hours stay flexible. It is treated as requiring more oversight than fixed price for that reason.

Yes. On GSA schedules especially, agencies may take your developed hourly rates, lock the estimated hours, and convert the effort to a fixed price.

WiseCost offers a 14-day free trial, no credit card required. You can also run our free DCAA Readiness Self-Assessment to see whether your books would meet an SF-1408 review.

Based on the DCAA Ready webinar series, Session 04: Bid & Proposal — Building Rates That Win Contracts, featuring Brian Wendroff, CPA (Wendroff & Associates, CPA) and Paul Calabrese, a former DCAA auditor (GRF CPAs & Advisors). Figures are illustrative and not benchmarks.