Cost-Reimbursable Contract

A cost-reimbursable contract (FAR terminology: cost-reimbursement contract) is a federal procurement contract type, governed by Federal Acquisition Regulation (FAR) Subpart 16.3, in which the government pays a contractor’s allowable, allocable costs actually incurred, up to a negotiated ceiling, plus a fee. It is the FAR’s answer to the fixed-price contract for work whose scope or cost cannot be pinned down accurately enough at award to price it as a lump sum — the defining use case for most federally funded research and development.

What FAR Part 16.3 actually requires

FAR 16.301-1 defines the type plainly: cost-reimbursement contracts “provide for payment of allowable incurred costs, to the extent prescribed in the contract.” The contract still carries a negotiated estimated total cost, used to obligate funds and set a ceiling the contractor may not exceed without contracting-officer approval — a contractor that keeps working past the ceiling without approval does so at its own financial risk.

FAR 16.301-2 restricts when a contracting officer may actually choose this type: only when (1) “circumstances do not allow the agency to define its requirements sufficiently to allow for a fixed-price type contract,” or (2) “uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.” The choice has to be documented in an acquisition plan approved one level above the contracting officer. FAR 16.301-3 then layers on real limitations: the contractor’s accounting system must be adequate to determine costs applicable to the contract, the government must have adequate resources to actually monitor and administer a cost-type award, and cost-reimbursement contracts are flatly prohibited for the acquisition of commercial products and commercial services.

The cost-reimbursement family: five distinct sub-types

FAR Subpart 16.3 is not a single contract type — it groups five, distinguished by whether and how a fee is paid:

• Cost contract (FAR 16.302) — no fee at all; reserved almost exclusively for research and development work with nonprofit institutions.
• Cost-sharing contract (FAR 16.303) — again no fee, and the contractor is reimbursed for only an agreed-upon portion of its allowable costs, absorbing the rest in expectation of some other, non-fee benefit from the work.
• Cost-plus-incentive-fee (CPIF) contract (FAR 16.304, detailed at 16.405-1) — the contractor and agency negotiate a target cost, a target fee, and minimum/maximum fee limits tied together by a share ratio. If final allowable cost comes in under the target, the fee increases above the target fee (up to the maximum); if cost runs over target, the fee decreases (down to the minimum) — a direct cost-control incentive built into the fee formula itself.
• Cost-plus-award-fee (CPAF) contract (FAR 16.305) — combines a (typically small or zero) base fee with an additional award-fee amount the government determines subjectively, based on its judgment of the contractor’s performance against criteria in an award-fee plan, rather than a mechanical cost formula.
• Cost-plus-fixed-fee (CPFF) contract (FAR 16.306) — the most common form in research contracting. The fee is negotiated once, at inception, and does not vary with actual cost (though it can be adjusted if the scope of work itself changes). FAR 16.306 further splits CPFF into two forms: the completion form, which defines the work by a specific end product or goal the contractor must deliver within the estimated cost to earn the full fee (preferred whenever the work can be defined precisely enough to support it), and the term form, which instead obligates the contractor to expend a specified level of effort over a stated period, with the fixed fee payable at the end of that period once the contractor attests the required effort was expended.

Why it is the default vehicle for high-uncertainty R&D

FAR Subpart 35.006, which governs contract-type selection specifically for research and development, states the rationale directly: because R&D work characteristically cannot be described with precise specifications and its cost cannot be estimated with confidence, “the use of cost-reimbursement contracts is usually appropriate,” and development effort in particular is often structured as a cost-reimbursement completion arrangement. The same section frames this as a deliberate progression rather than a fixed rule: as a project’s technical approach becomes more firmly established and its risks narrow — moving from early exploratory R&D toward production or a well-specified deliverable — contract type is expected to progress from cost-reimbursement toward fixed-price. A cost-reimbursable contract, in other words, is not a default preference; it is what FAR requires when the government genuinely cannot price the work any other way, and it is expected to give way to fixed-price arrangements once that stops being true.

Where it sits in the federal funding-instrument taxonomy

“Cost-reimbursable” describes how a contractor is paid, not which legal instrument the award is. That second question — contract, grant, or cooperative agreement — is answered separately, under the Federal Grant and Cooperative Agreement Act of 1977 (31 U.S.C. §§ 6303–6305):

• A procurement contract (31 U.S.C. § 6303, FAR-governed) is used when the government is acquiring property or services for its own direct use or benefit — a cost-reimbursable contract is one pricing structure available within this instrument.
• A grant agreement (31 U.S.C. § 6304, 2 CFR 200.1) is used when the principal purpose is instead to support a public purpose, with no substantial agency involvement anticipated in carrying out the work — see CASRAI’s Cost reimbursement entry for how this same “pay for allowable actual cost” logic also underlies most federal grants, governed there by 2 CFR 200 Subpart E rather than the FAR.
• A cooperative agreement (31 U.S.C. § 6305, 2 CFR 200.1) applies the same public-purpose test as a grant, except that the agency anticipates substantial involvement in carrying out the funded activity — see CASRAI’s Cooperative agreement entry.

A research administrator evaluating a new federal award therefore has to answer two independent questions, not one: which instrument is this (contract vs. grant vs. cooperative agreement — a legal-purpose test), and how is it priced (cost-reimbursement vs. fixed-price — a risk-allocation test). A cost-reimbursable contract sits at the intersection of “acquisition for the government’s own use” and “cost-based payment”; an equivalent-feeling but legally distinct award — say, an NIH U01 cooperative agreement reimbursing the same kind of actual costs — sits at “public-purpose assistance with substantial agency involvement” instead. For the fuller side-by-side across all three instruments, including audit-scope and cost-principle differences, see CASRAI’s comparison Grant vs. Contract vs. Cooperative Agreement and the Federal Government Contracts vs. Grants for University Research guide.

What it means administratively for a university or nonprofit recipient

Which cost principles govern a cost-reimbursable contract depends on who holds it, and the answer surprises people who assume “FAR contract” automatically means “FAR Part 31 cost principles.” Under 2 CFR § 200.101(c)(2), when a non-federal entity — a university, nonprofit research institute, or similar — is awarded a cost-reimbursement contract under the FAR, only Subpart D (§§ 200.331–200.333, subrecipient monitoring), and Subparts E (Cost Principles) and F (Audit Requirements) of the Uniform Guidance apply; the terms and conditions of the contract and the FAR itself prevail over the rest of 2 CFR 200 where they conflict. In practice, that means a university’s federal cost-reimbursement contract is still largely priced and audited under the same 2 CFR 200 Subpart E cost principles that govern its federal grants and cooperative agreements — not FAR Part 31, which instead governs for-profit contractors on the same type of award. FAR 16.301-3’s own limitation — that the contractor must have an accounting system adequate to determine costs applicable to the contract — is exactly what a university’s federally negotiated indirect cost rate agreement and effort-reporting system exist to satisfy.

The practical upshot for a sponsored-programs office: a cost-reimbursable contract carries the same actual-cost documentation burden as a cost-reimbursement grant (see Direct costs and Indirect costs (overheads)), but layers FAR-specific contract clauses, government surveillance, and — depending on dollar value — potential Cost Accounting Standards coverage on top, none of which apply to a grant or cooperative agreement of the same size.

Related CASRAI content

• Dictionary: Cost reimbursement — the broader payment-basis concept shared with grants
• Dictionary: Cooperative agreement
• Dictionary: Fixed-price grant — the opposite pricing model
• Dictionary: Direct costs
• Dictionary: Indirect costs (overheads)
• Comparison: Grant vs. Contract vs. Cooperative Agreement
• Guide: Federal Government Contracts vs. Grants for University Research
• Guide: Uniform Guidance (2 CFR 200)
• Domain: Funding lifecycle and financial vocabulary