What is the difference between fixed-price and cost-reimbursement contracts in negotiation?

• A. Fixed-price sets price regardless of actual costs; cost-reimbursement allows payment for allowable costs plus fee or profit and shifts more cost risk to the government.
• B. Fixed-price contracts require the government to reimburse costs.
• C. Cost-reimbursement contracts fix the price regardless of costs.
• D. There is no difference in risk between the two.

Answer: (A)

Pricing structure and risk allocation are at the heart of the difference. In a fixed-price contract, the price is set upfront and does not change with the actual costs the contractor incurs, so the contractor bears most of the cost risk and must manage costs to protect profit. In a cost-reimbursement contract, the government pays allowable costs incurred plus an added fee or profit for the contractor, so the contractor’s cost risk is reduced while the government takes on more of the financial risk of cost overruns, subject to audits and allowability rules. This contrast is why that option best captures how the two contract types differ. The other ideas misstate who pays costs or imply there’s no difference in risk.