FAR 16.3—Subpart 16.3

General.

Cost contracts.

FAR 16.302 explains what a cost contract is, when it may be used, and where its use is limited. It defines a cost contract as a cost-reimbursement contract with no fee, then identifies the type of work for which it may be appropriate—especially research and development, including work performed by nonprofit educational institutions and other nonprofit organizations. The section also points readers to the broader limitations in FAR 16.301-3, which means a contracting officer cannot treat this as a free-standing authority without checking the general rules governing cost-reimbursement contracting. In practice, this section matters because it signals that the Government may reimburse allowable costs without paying profit or fee, but only in situations where that structure fits the acquisition objective and complies with the cost-reimbursement requirements. For contractors, it means they may recover allowable costs but should not expect a fee component. For contracting officers, it is a reminder to justify the contract type carefully and ensure the arrangement is consistent with the FAR’s cost-reimbursement limitations.

Cost-sharing contracts.

FAR 16.303 explains what a cost-sharing contract is, when it may be used, and what limits apply. It covers three main subjects: the definition of a cost-sharing contract, the circumstances under which the Government may use this contract type, and the cross-reference to the broader limitations in FAR 16.301-3. In practical terms, this section describes a cost-reimbursement arrangement where the contractor does not receive a fee and instead is paid only for an agreed-upon share of allowable costs. The key policy idea is that the contractor voluntarily accepts part of the financial burden because it expects substantial compensating benefits, such as access to research results, technology development, or other business advantages. For contracting officers, this section is a reminder that cost-sharing is not a default contract type and must be justified by the expected mutual benefit and the limitations in the cost-reimbursement rules. For contractors, it signals that participation means real financial risk because some allowable costs will not be reimbursed.

Cost-plus-incentive-fee contracts.

FAR 16.304 defines the cost-plus-incentive-fee (CPIF) contract and places it within the broader framework of incentive contracting. This section explains that a CPIF contract is a cost-reimbursement contract with an initially negotiated fee that is later adjusted by a formula tied to the relationship between total allowable costs and total target costs. It also points readers to subpart 16.4 for the general rules on incentive contracts, to FAR 16.405-1 for a fuller discussion of when and how CPIF contracts should be used, and to FAR 16.301-3 for applicable limitations. In practice, this section matters because it tells contracting officers and contractors that the fee is not fixed at award; instead, it moves up or down based on actual cost performance against the target. That makes CPIF contracts useful when the government wants to motivate cost control while still using a cost-reimbursement structure for work that cannot be priced with enough certainty at the outset. The section is short, but it is foundational because it defines the contract type and directs users to the more detailed rules that govern its proper application.

Cost-plus-award-fee contracts.

FAR 16.305 defines the cost-plus-award-fee (CPAF) contract and places it within the broader framework of cost-reimbursement and incentive contracting. This section explains that a CPAF contract includes two fee components: a base amount, which may be zero and is fixed at contract inception, and an award amount that is determined later through the Government’s judgmental evaluation of performance. It also points readers to subpart 16.4 on incentive contracts, especially FAR 16.401(e), for a fuller discussion of how award-fee contracts work in practice. In addition, it flags important limitations in FAR 16.301-3 and FAR 16.401(e)(5), signaling that CPAF contracts are not appropriate for every acquisition and must be used within specific policy constraints. Practically, this section matters because it tells contracting officers and contractors that the fee is not formula-driven; instead, the Government retains discretion to assess performance against subjective criteria and decide how much award fee, if any, is earned. That makes clear performance plans, evaluation procedures, and disciplined administration essential to avoid disputes and ensure the fee structure actually motivates excellence.

Cost-plus-fixed-fee contracts.

FAR 16.306 explains the cost-plus-fixed-fee (CPFF) contract type, a cost-reimbursement arrangement in which the contractor is paid allowable costs plus a fee that is fixed when the contract is awarded. It covers what CPFF is, why it exists, when it is appropriate to use, when it generally should not be used, and the legal limitations that must be satisfied before award. The section also distinguishes the two CPFF forms—completion and term—and explains how each form allocates risk, defines the work, and triggers payment of the fixed fee. In practice, this section matters because CPFF is often used for research, exploratory work, and development efforts where the scope or level of effort cannot be estimated with enough precision for a fixed-price contract. It also warns contracting officers that CPFF provides only limited incentive for cost control, so it should be selected carefully and only when the regulatory conditions are met. The completion-versus-term distinction is especially important because it affects deliverables, fee payment, and whether additional effort can be required without increasing the fee. The section also reinforces that term-form renewals are new acquisitions, not automatic extensions, which has important implications for competition, funding, and pricing.

Contract clauses.

FAR 16.307 tells contracting officers which cost-related contract clauses must be included when the government contemplates specific contract types. It covers the mandatory use of the Allowable Cost and Payment clause and its alternates, including special treatment for cost-reimbursement contracts, time-and-materials contracts, labor-hour contracts, construction contracts, educational institutions, State and local governments, and nonprofit organizations. It also identifies when to use the Fixed Fee, Fixed-Fee-Construction, Incentive Fee, Cost Contract-No Fee, Cost-Sharing Contract-No Fee, and Predetermined Indirect Cost Rates clauses. In practice, this section is a clause-selection roadmap: it ensures the contract’s payment, reimbursement, fee, and indirect cost terms match the contract structure and the type of contractor. The rule matters because using the wrong clause can create payment errors, compliance problems, and disputes over what costs are allowable, how fee is earned, and whether withholding or indirect cost treatment applies. For contractors, it signals what billing and accounting rules will govern performance; for contracting officers, it is a required checklist item during solicitation and award preparation.