When a federal agency funds a university through a contract rather than a grant or cooperative agreement, the Federal Acquisition Regulation (FAR) still gives the contracting officer a further choice to make: how the contract is priced. That pricing-type decision is governed by FAR Part 16, and it falls into three broad families — firm-fixed-price (FFP), the cost-reimbursement family, and time-and-materials/labor-hour (T&M) contracts — each of which allocates cost risk and imposes recordkeeping obligations differently. This page is an orientation to all three as a category, so a sponsored-programs office can identify which one it is looking at and know where to go for the deeper mechanics of each.
Two closely related questions are covered elsewhere on CASRAI and are intentionally out of scope here. Whether an award is a grant, contract, or cooperative agreement in the first place is a separate legal question, decided under the Federal Grant and Cooperative Agreement Act of 1977 — see Grant vs. Contract vs. Cooperative Agreement. And the detailed side-by-side of the two largest families — firm-fixed-price versus cost-reimbursement — including FAR citations, audit burden, and accounting-system requirements, is covered in full in CASRAI’s Cost-Reimbursable vs. Fixed-Price Contracts comparison. This guide instead treats all three pricing families as one taxonomy, gives each a proportionate summary, and goes into more depth specifically on time-and-materials contracts, which neither of those other pages addresses.
Why pricing type matters, independent of instrument type
A university can hold a federal contract priced any of these three ways, just as a company holding a defense-procurement contract can. FAR 16.101(b) directs contracting officers to select “the contract type (or combination of types) that will appropriately tie profit or fee to contractor performance,” and FAR 16.104 lists the factors that decision must weigh — price competition, the reliability of cost or pricing data, the complexity and duration of the work, and how precisely the requirement can be defined up front. FAR Subpart 35.006, which governs contract-type selection specifically for research and development, states that R&D work “normally will not permit the contracting officer to establish precise specifications” or accurate cost estimates at the outset, which is why cost-reimbursement contracts predominate in federally funded university research — but it is not the only type a research institution will ever see, particularly on service-type task orders, instrumentation support, or work with a defined, bounded scope.
Firm-fixed-price (FFP) contracts, briefly
Under FAR Subpart 16.2, a firm-fixed-price contract sets a single price that does not change regardless of the contractor’s actual cost experience. FAR 16.103(a) states that this type “places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss” and that agencies should use it “when the risk involved is minimal or can be predicted with an acceptable degree of certainty.” For a university, an FFP contract shifts the cost-estimation burden to proposal stage: once the price is set, the institution keeps any surplus and absorbs any shortfall itself, and detailed incurred-cost tracking for reimbursement purposes generally is not required (residual-fund and cost-accounting practice still matter internally, but not to the sponsor). See the Cost-Reimbursable vs. Fixed-Price Contracts comparison for the fuller breakdown, including the other fixed-price variants FAR 16.2 recognizes (fixed-price with economic price adjustment, fixed-price incentive) and how a fixed-price grant uses the same logic outside the FAR contracting context entirely.
The cost-reimbursement family, briefly
Under FAR Subpart 16.3, a cost-reimbursement contract pays the contractor’s allowable, allocable costs actually incurred, up to a negotiated ceiling — the government, not the university, bears the risk of a cost overrun within that ceiling. This is the family FAR Subpart 35.006 treats as the usual default for R&D, and it carries the heaviest administrative burden of the three: allowability, allocability, and reasonableness determinations under 2 CFR 200 Subpart E, direct/indirect cost segregation (see CASRAI’s Direct Costs and Indirect Costs (Overheads) entries), effort reporting, and exposure to a Single Audit under 2 CFR 200 Subpart F. FAR 16.301-3 adds a contract-specific gate on top: the contracting officer must determine the institution’s accounting system is adequate to segregate and accumulate allowable costs before a cost-reimbursement contract can be awarded at all. The Cost-Reimbursable Contract dictionary entry and the Cost-Reimbursable vs. Fixed-Price Contracts comparison cover the five FAR 16.3 sub-types (cost, cost-sharing, cost-plus-incentive-fee, cost-plus-award-fee, and cost-plus-fixed-fee) in full.
Time-and-materials (T&M) and labor-hour contracts
The third family, governed by FAR Subpart 16.6, is structurally different from both of the above. A time-and-materials contract pays the contractor at specified fixed hourly labor rates — rates that are meant to already include wages, overhead, general and administrative expense, and profit — for direct labor hours actually expended, plus the actual cost of materials used, per FAR 16.601(b). A labor-hour contract (FAR 16.602) is a variant of the same structure used when the contractor furnishes no materials, so only the labor-hour rate applies. Neither type ties payment to a fixed total price (like FFP) or to allowable-cost documentation (like cost-reimbursement); payment tracks hours worked at a pre-negotiated rate.
FAR restricts when a T&M or labor-hour contract may be used at all. FAR 16.601(c) permits it only “when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence,” and FAR 16.601(d)(1) requires the contracting officer to sign a written determination and finding, before the contract is executed, that no other contract type is suitable — a document that, for contracts exceeding three years, must also be approved by the head of the contracting activity. FAR 16.601(c) is explicit about why this type is used only as a fallback: it “provides no positive profit incentive to the contractor for cost control or labor efficiency,” so the government is expected to maintain active surveillance of contractor performance rather than relying on the pricing structure itself to discipline cost. Every T&M contract must also include a ceiling price that the contractor exceeds at its own risk (FAR 16.601(d)(2)), and for non-competitively awarded contracts, hourly rates for labor transferred between divisions of the same organization may not include profit for the transferring unit, though the prime contractor may still earn profit overall (FAR 16.601(c)(2)(iii)).
What this means for a university
T&M contracts are uncommon as the primary vehicle for a sponsored research project — the same unpredictability that makes cost-reimbursement the usual R&D default also makes a T&M contract’s narrow-use standard hard to justify for a full research scope, and a research institution’s effort-based cost accounting doesn’t map cleanly onto a specified hourly billing rate designed around commercial service labor. Where a university sponsored-programs office is more likely to encounter one is on a bounded services task order under a larger contract vehicle — technical support, testing services, or a defined-scope task issued under an indefinite-delivery/indefinite-quantity (IDIQ) contract — where the extent of labor genuinely cannot be estimated up front but the work itself is not research in the FAR 35.006 sense. Because a T&M contract requires a signed determination and finding that no other type is suitable, an institution offered one should expect the contracting officer to document why FFP or cost-reimbursement pricing was not used, and should independently confirm the negotiated hourly rates are adequate to cover actual labor cost plus applicable indirect costs, since (unlike a cost-reimbursement contract) there is no separate reimbursement mechanism if the negotiated rate proves too low.
A related, but separate, question: is it even a contract?
None of the pricing-type analysis above answers whether a given federal award is a grant, a cooperative agreement, or a procurement contract in the first place — that threshold question is answered by the Federal Grant and Cooperative Agreement Act of 1977 and covered in CASRAI’s Grant vs. Contract vs. Cooperative Agreement comparison. One frequent point of confusion for universities specifically involves SBIR/STTR: Phase I and II awards from most participating agencies are grants or cooperative agreements, but some agencies (notably the Department of Defense) issue SBIR/STTR awards as FAR-governed procurement contracts instead, which then get priced using the same FFP, cost-reimbursement, or T&M framework described on this page. See CASRAI’s SBIR Contracts: When the Award Is a Contract, Not a Grant guide for how that distinction plays out administratively.
Frequently asked questions
Which pricing type is most common for federally funded university research?
Cost-reimbursement, because FAR Subpart 35.006 treats R&D work’s inherent cost and scope uncertainty as the reason cost-reimbursement contracting is “usually appropriate.” FFP contracts appear for well-defined, lower-risk scopes (and are common structurally in fixed-price grants and some SBIR Phase I awards), while T&M/labor-hour contracts are the least common of the three for research itself and are more likely to appear on bounded services task orders.
Can a single federal award combine more than one pricing type?
Yes. FAR 16.101(b) explicitly allows “a combination of types” where appropriate, and IDIQ contracts in particular often issue individual task or delivery orders under different pricing types depending on each order’s own scope and risk profile, even though the base contract vehicle is the same.
Does a T&M contract require the same indirect-cost-rate documentation as a cost-reimbursement contract?
Not in the same way. A cost-reimbursement contract reimburses actual allowable costs, including negotiated indirect costs, against 2 CFR 200 Subpart E allowability rules. A T&M contract instead pays pre-negotiated fixed hourly rates that are supposed to already fold in overhead and indirect cost recovery — the institution’s negotiated indirect cost rate still matters when the hourly rates are originally negotiated, but there is no separate incurred-cost reimbursement process layered on top the way there is under FAR Subpart 16.3.
