FAR 16.306—Cost-plus-fixed-fee contracts.
Plain-English Summary
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.
Key Rules
Fixed fee is set upfront
A CPFF contract pays allowable costs plus a negotiated fee fixed at contract inception. The fee does not change with actual cost, although it may be adjusted if the work itself changes.
Used for uncertain efforts
CPFF is appropriate when the conditions in FAR 16.301-2 are present, such as research, preliminary exploration, or study where the level of effort is unknown, or development and test work where a cost-plus-incentive-fee contract is not practical.
Not for mature major systems
CPFF normally should not be used for development of major systems once preliminary work shows the effort is likely achievable and the Government has reasonably firm performance objectives and schedules.
Must satisfy fee limitations
No CPFF contract may be awarded unless the contracting officer complies with the limitations in FAR 15.404-4(c)(4)(i) and FAR 16.301-3. These provisions restrict fee use and require the contracting officer to follow the applicable cost/fee policy before award.
Completion form has a deliverable
The completion form defines the work by a definite goal or target and a specified end product. The contractor normally must complete and deliver that end product to earn the full fixed fee, although the Government may require additional effort without increasing the fee if it increases the estimated cost.
Term form buys effort, not a result
The term form describes the work in general terms and requires the contractor to provide a specified level of effort for a stated period. If performance is satisfactory, the fixed fee is payable at the end of the period after the contractor states the required effort was expended.
Completion form is preferred
When the work or milestones can be defined well enough to estimate completion, the completion form should be used instead of the term form because it better reflects the contractor’s obligation and gives clearer performance expectations.
Term form requires specific effort
The term form may not be used unless the contract obligates the contractor to provide a specific level of effort within a definite time period. General or open-ended support is not enough.
Responsibilities
Contracting Officer
Determine whether CPFF is appropriate under FAR 16.301-2, ensure all fee limitations and approval requirements are satisfied, choose the proper form (completion or term), and document the contract structure so the scope, fee, and payment conditions are clear.
Contractor
Perform the work in accordance with the contract form, manage costs within the reimbursable structure, deliver the specified end product under a completion form, or provide the required level of effort for the stated period under a term form, and submit the required statement when seeking fee payment under a term form.
Agency/Program Office
Define the technical need, performance objectives, milestones, and level of effort as clearly as possible so the contracting officer can decide whether CPFF is suitable and whether the completion form can be used.
Government/Technical Representative
Monitor performance and determine whether work is satisfactory, especially for term-form contracts where fee payment depends on satisfactory performance at the end of the period.
Practical Implications
CPFF is a flexibility tool, not a default choice. It is best for uncertain research or development work, but it should not be used just because the requirement is hard to price.
The form of the contract matters a lot. Completion form focuses on delivering a defined end product, while term form focuses on expending a specified level of effort; mixing those concepts creates disputes over payment and performance.
Term-form CPFF can create renewal and funding pitfalls. Each additional period is a new acquisition, so agencies must plan for new cost and fee arrangements rather than assuming an automatic extension.
Contracting officers should be cautious in major systems development. Once the program has enough maturity and stable objectives, CPFF is usually no longer the preferred structure.
Because the fee is fixed, contractors have limited incentive to reduce costs, so close cost monitoring and disciplined scope control are important to avoid overruns and unnecessary growth in estimated cost.
Official Regulatory Text
(a) Description. A cost-plus-fixed-fee contract is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract. This contract type permits contracting for efforts that might otherwise present too great a risk to contractors, but it provides the contractor only a minimum incentive to control costs. (b) Application. (1) A cost-plus-fixed-fee contract is suitable for use when the conditions of 16.301-2 are present and, for example- (i) The contract is for the performance of research or preliminary exploration or study, and the level of effort required is unknown; or (ii) The contract is for development and test, and using a cost-plus-incentive-fee contract is not practical. (2) A cost-plus-fixed-fee contract normally should not be used in development of major systems (see part 34 ) once preliminary exploration, studies, and risk reduction have indicated a high degree of probability that the development is achievable and the Government has established reasonably firm performance objectives and schedules. (c) Limitations . No cost-plus-fixed-fee contract shall be awarded unless the contracting officer complies with all limitations in 15.404-4 (c)(4)(i) and 16.301-3 . (d) Completion and term forms . A cost-plus-fixed-fee contract may take one of two basic forms-completion or term. (1) The completion form describes the scope of work by stating a definite goal or target and specifying an end product. This form of contract normally requires the contractor to complete and deliver the specified end product ( e.g., a final report of research accomplishing the goal or target) within the estimated cost, if possible, as a condition for payment of the entire fixed fee. However, in the event the work cannot be completed within the estimated cost, the Government may require more effort without increase in fee, provided the Government increases the estimated cost. (2) The term form describes the scope of work in general terms and obligates the contractor to devote a specified level of effort for a stated time period. Under this form, if the performance is considered satisfactory by the Government, the fixed fee is payable at the expiration of the agreed-upon period, upon contractor statement that the level of effort specified in the contract has been expended in performing the contract work. Renewal for further periods of performance is a new acquisition that involves new cost and fee arrangements. (3) Because of the differences in obligation assumed by the contractor, the completion form is preferred over the term form whenever the work, or specific milestones for the work, can be defined well enough to permit development of estimates within which the contractor can be expected to complete the work. (4) The term form shall not be used unless the contractor is obligated by the contract to provide a specific level of effort within a definite time period.