Cost-Plus-Fixed-Fee Contracts: Fee Caps, Forms, and Examples

A cost-plus-fixed-fee contract, often shortened to CPFF, reimburses the contractor for every allowable expense incurred during a project and pays a flat profit amount that was negotiated before work began. The fee stays the same whether the project comes in under budget or runs well past its original estimate.¹ Federal agencies reach for this structure when technical uncertainty makes it impossible to price the work accurately enough for a fixed-price deal, and contractors accept the capped profit in exchange for guaranteed cost coverage.² The buyer carries the financial risk of overruns. The contractor carries the obligation to spend responsibly.

How the Payment Mechanic Works

The core is simple. The government pays every verified cost the contractor incurs, plus a dollar-amount fee locked in at contract signing. That fee does not move with actual spending. If the project costs more than expected, the buyer covers the additional expenses and the fee stays put. If costs come in lower, the buyer saves money and the contractor still collects the full fee.¹

The fee can be adjusted for one reason only: a change in the scope of work itself. If the government modifies the contract to add or remove tasks, the fee can be renegotiated to match the new scope. A cost overrun by itself never triggers a fee increase. This is the defining difference between CPFF and cost-plus-percentage-of-cost arrangements, which are prohibited in federal procurement precisely because they reward higher spending.

For a billed expense to qualify for reimbursement, it must be reasonable, properly allocated to the specific project, and consistent with federal cost principles.³ A cost is reasonable if a sensible business owner facing the same circumstances would have spent the same amount, and the contractor bears the burden of proving that when a cost is challenged.⁴

Completion Form and Term Form

CPFF contracts come in two varieties, and the distinction matters more than most contractors realize on their first cost-reimbursement deal.

Completion Form

A completion-form contract requires the contractor to deliver a specific end product, such as a final research report or a working prototype. The contractor earns the full fee only by finishing and delivering that product. If costs exceed the original estimate, the government can require the contractor to keep working without any fee increase, provided the government raises the estimated cost ceiling. The contractor finishes the job and collects the same fee regardless of how much extra effort it took.¹

Term Form

A term-form contract obligates the contractor to provide a specified level of effort, usually measured in labor hours, over a defined time period, without promising a concrete deliverable. If the government considers the effort satisfactory at the end of the period, the contractor earns the full fee. Renewing for another period counts as an entirely new procurement with fresh cost and fee negotiations.¹

The FAR favors the completion form whenever the work can be defined clearly enough to set meaningful milestones. Term-form contracts are reserved for open-ended work like ongoing research support or advisory services where outcomes genuinely cannot be predicted. A term-form contract cannot be awarded unless it obligates a specific level of effort within a definite time period.

Statutory Fee Caps

Federal law limits how large the fixed fee can be, expressed as a percentage of the contract’s estimated cost (excluding the fee itself). The caps turn on the type of work:⁵

Research, experimental, or developmental work: the fee cannot exceed 15 percent of estimated cost.
Architectural or engineering services for public works: the fee cannot exceed 6 percent of the estimated cost of the project.
All other CPFF contracts: the fee cannot exceed 10 percent of estimated cost.

Identical caps apply to civilian agencies under 41 U.S.C. § 3905 and to the Department of Defense under 10 U.S.C. § 3322.⁶ Contracting officers verify compliance before award.⁷ Because the fee is a fixed dollar amount rather than a percentage of actual spending, a contractor gains nothing financially by running up costs. The fee was already locked in.

Worked Examples

A Research and Development Prototype

A defense agency contracts with an engineering firm to develop a deep-sea sensor prototype. Estimated cost is $1,000,000 and the negotiated fixed fee is $80,000, which is 8 percent of estimated cost and well within the 15 percent cap for R&D. During development, the team runs into unforeseen material compatibility problems that push actual costs to $1,300,000. The agency pays the full $1,300,000 in verified allowable expenses. The contractor still receives only the original $80,000. A 30 percent cost overrun generates no additional profit.

Now reverse it. The engineering team solves the design challenge faster than expected and actual costs total $750,000. The agency pays $750,000 in costs and the full $80,000 fee. The agency saved $250,000, and the contractor’s profit as a share of actual cost rises to roughly 10.7 percent even though the dollar amount never changed.

An Environmental Remediation

A contractor estimates $500,000 to clean up a contaminated site with a fixed fee of $40,000. Initial soil surveys suggest heavy contamination, but excavation reveals a smaller problem than feared. Actual costs come in at $350,000. The buyer pays $350,000 plus the full $40,000 fee. The contractor’s profit works out to about 11.4 percent of actual cost.

Had the contamination been worse and costs climbed to $650,000, the buyer would owe the full $650,000 in allowable expenses plus the same $40,000 fee. The buyer absorbed a $150,000 cost increase and the contractor’s profit stayed flat. That is the risk allocation in concrete numbers.

How CPFF Compares to Other Contract Types

CPFF sits toward one end of a risk spectrum. Where it falls helps explain why agencies choose it and when they don’t.

Firm-fixed-price. The contractor agrees to deliver the work for a set price and absorbs every dollar of cost overrun. Maximum risk on the contractor, maximum incentive to control costs. Agencies use fixed-price contracts when the scope is well-defined and costs are predictable.
Cost-plus-incentive-fee (CPIF). The buyer reimburses allowable costs, but the fee adjusts up or down based on how actual costs compare to a target. Beat the target and the fee grows; overshoot it and the fee shrinks down to a negotiated minimum. This gives the contractor a stronger reason to control spending than CPFF does.
CPFF. The buyer reimburses costs and pays a flat fee. Agencies turn to it when uncertainties are too significant for fixed-price contracting and no meaningful cost target can be set for an incentive-fee structure.

The FAR is blunt about the trade-off. CPFF “provides the contractor only a minimum incentive to control costs.”¹ That candor explains one important boundary: agencies cannot use CPFF, or any other cost-reimbursement type, to buy commercial products or services.⁸

Which Costs Qualify for Reimbursement

Not every expense a contractor incurs will be reimbursed. The FAR draws a hard line between allowable and unallowable costs, and getting this wrong is one of the fastest ways to lose money on a cost-reimbursement contract.

To qualify, a cost must be reasonable in amount, directly allocable to the contract, consistent with the contractor’s own accounting policies, adequately documented, and compliant with generally accepted accounting principles.³ The government gives no presumption of reasonableness. If a contracting officer challenges a cost, the contractor has to prove it was justified.⁴

Some categories are flatly unallowable regardless of circumstances. The FAR prohibits reimbursement for entertainment expenses, alcoholic beverages, lobbying and political activity, bad debts, fines and penalties, interest and financing costs, losses on other contracts, and goodwill. These are automatic rejections during audit, and billing them can trigger broader scrutiny of a contractor’s entire cost submission.

The Cost Ceiling and the Limitation of Cost Clause

Every CPFF contract has an estimated cost that functions as a ceiling, and the Limitation of Cost clause governs what happens as spending approaches it. The contractor must notify the contracting officer in writing whenever costs already incurred, plus expected costs in the next 60 days, will exceed 75 percent of the estimated cost. Individual contracts can set that notification trigger anywhere between 75 and 85 percent.⁹

If costs are going to exceed the estimate, the contractor is not obligated to keep working past the funded amount, and the government is not obligated to reimburse costs above it. To continue, the contracting officer must issue a written increase to the estimated cost. Spending beyond the ceiling without that written modification is at the contractor’s own risk. No verbal approval, email, or handshake from a program manager substitutes for the contracting officer’s formal written notice.⁹

This is where CPFF contracts most commonly go wrong. A contractor keeps working because the program office says the money is coming, but the contracting officer never formally raises the ceiling. The contractor eats the overrun. Experienced government contractors treat the Limitation of Cost notification as one of the most important administrative tasks on any cost-reimbursement contract.

Accounting, Payment, and Fee Withholding

Before a contractor can win a cost-reimbursement contract, the government must confirm that the contractor’s accounting system can track costs at the individual-project level. The FAR requires an adequate accounting system as a precondition for any cost-reimbursement award.⁸ In practice, adequate means the system can separate direct costs (labor, materials, subcontractors) from indirect costs (overhead, general and administrative expenses), assign each charge to the correct contract, and produce reliable data for billing and audit.

The fixed fee is usually paid in increments tied to the percentage of work completed. A contractor who has finished roughly 25 percent of the project can expect about 25 percent of the fee alongside reimbursed costs. The government withholds a reserve from each fee payment to protect against overpayment, and that reserve cannot exceed 15 percent of the total fixed fee or $100,000, whichever is less.¹⁰ After the contractor submits an adequate final indirect cost rate proposal, the contracting officer releases 75 percent of all withheld fee amounts, and may release up to 90 percent based on the contractor’s track record with prior-year closeouts.

One documentation obligation catches contractors off guard because it comes after performance, not before. Organizations with cost-reimbursement contracts must submit a final indirect cost rate proposal within 180 days of the end of their fiscal year.¹¹ Missing that deadline can delay contract closeout and final fee payment for years.

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Acquisition.GOV. 48 CFR 16.306 – Cost-Plus-Fixed-Fee Contracts
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Acquisition.GOV. 48 CFR 16.301-2 – Application
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Acquisition.GOV. Federal Acquisition Regulation Part 31 – Contract Cost Principles and Procedures
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Acquisition.GOV. 48 CFR 31.201-3 – Determining Reasonableness
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Office of the Law Revision Counsel. 41 USC 3905 – Cost-Plus-a-Fixed-Fee Contracts
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Office of the Law Revision Counsel. 10 USC 3322 – Cost Contracts
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Acquisition.GOV. 48 CFR 15.404-4 – Profit
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Acquisition.GOV. 48 CFR 16.301-3 – Limitations
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Acquisition.GOV. 48 CFR 52.232-20 – Limitation of Cost
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Acquisition.GOV. 48 CFR 52.216-8 – Fixed Fee
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U.S. Department of Labor. Frequently Asked Questions