Types of Government Contracts for Small Businesses: What Do You Need to Know?

Types of Government Contracts for Small Businesses: What Do You Need to Know?

Next Insurance Staff
By Next Insurance Staff
Aug 7, 2018
6 min read

Let’s face it, the government has a lot of money to spend and won’t be going out of business any time soon. That makes the American government a perfect client for your business! At any given time, the government needs people to provide everything from catering to cleaning services to tech consulting to manufactured products. 23% of the budget for these services is set aside as government small business contracts. That means that federal business opportunities are out there waiting for you. To help you go out and get them, we’ve compiled an extensive list of the different types of government contracts you’ll need to know.

Fixed-Price Contracts

These straightforward government contract opportunities have a price determined in advance. They’re used when the scope of the work is clear from the beginning. However, there are a number of variations on this contract type that are slightly more complex. These types of government contracts for small business, and in general, include:

Firm Fixed-Price (FFP)

For firm fixed-price contracts, there's no playing with the agreed-upon price and the service provider fulfilling the small business contract is the one taking on the risk. If the project is over budget, the business owner pays, and if it’s under-budget they get to keep the profits. If you're good at knowing your costs quite precisely, this type of contract could really work for you.

FFP Level-of-Effort

This type of contract defines the level of effort the service provider will commit to the project, rather than results. It’s commonly used for things like research that are hard to define in advance.

FFP Materials Reimbursement

FFP materials reimbursement contracts have a predetermined price for the service, but the service provider is reimbursed at the end of the project for the cost of the materials used. It’s especially common for repair and overhaul contracts, where the cost of materials may not be totally clear at the start.

Fixed-Price with Award Fees

A fixed price with award fees contract offers a fixed price for objective performance success with additional awards to incentivize more subjective qualities like aesthetic appearance and technical flair.

Fixed-Price with Economic Price Adjustment

In this type of contract, the price can be adjusted at the end of the project to account for changes in the cost of labor, materials, or market prices of specific items in the contract. The criteria for these kinds of price changes must be defined in the original contract.

Fixed Price Incentive (FPI)

This contract states a maximum price but it also awards the service provider for coming in under budget. That means that if you spend less, your profit is larger.

Cost-Reimbursement Contracts

Cost-reimbursement is a category of contracts that's used when it would be too difficult to estimate the cost of the project in advance. They usually define a spending limit but are a much lower risk for the service provider than fixed-price contracts. Like fixed-price contracts, however, there are a number of types of cost-reimbursement contracts:

Cost Contracts

If you have a cost contract, only the expenses are paid, with no additional profit for the service provider. This contract type is often used for research and other services provided by non-profits.


This combination contract includes a ceiling for expenses that will be reimbursed along with a fixed payment for the service provider.


Like FPI contracts, this provides a financial incentive for the service provider to come in under budget, while also covering project expenses.


This contract states that the government client will pay the expenses of completing the project and also provides financial awards based on criteria outlined in advance.

Cost Sharing

This type of contract only pays a predetermined portion of the costs. It’s most common in research contracts where the service provider will benefit in other ways from the results of the research.

Time and Materials Contracts

These contracts are fairly rare because they require the government to pay directly for all the costs associated with the project, with no limit specified. Labor Hour Contracts are a type of Time and Materials contract that doesn’t include the cost of materials.

Indefinite Delivery Contracts

This contract type is used when the government doesn’t know in advance how much of a product or service it’ll need. Instead, it specifies a range and selected companies can bid to provide the lowest price per item. This contract category, including Task-Order-Contracts and Job-Order contracts, can be agency-specific or issued for government-wide service.

The Challenges of Federal Contracts for Small Business

No matter what type of contract you’re going for, winning government contracts can be an intimidating process. Government contract opportunities for small businesses are highly competitive and require a lot of meticulous work in order to apply. But if you can put in the time, government contracts for small business can be worth the effort in the long run.

How to Get Government Contracts for Small Business

Learning how to win government contracts for your small business isn’t easy, but there are a lot of resources available to help. The key is preparation. Start by making sure that you have done everything you can to present the image of a scrupulously responsible business-owner: your licensing should be up to date and you should have good general liability insurance as well as any other contractor insurance policies and certifications that are relevant for your field. Then you can begin researching what federal contract opportunities for small businesses are open to you.

Good luck!

Types of Government Contracts for Small Businesses: What Do You Need to Know?


Next Insurance Staff Bio
About the author

NEXT’s mission is to help entrepreneurs thrive.

We’re doing that by building the only technology-led, full-stack provider of small business insurance in the industry, taking on the entire value chain and transforming the customer experience.

We want to make sure you have all of the information you need to make an informed decisions about purchasing business insurance. We hope you’ll find this information helpful.

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