Understanding Government Contract Types in the Aerospace & Defense Industry: A Guide

Jul 17, 2025

Understanding Government Contract Types in the Aerospace & Defense
Industry: A Guide

Introduction
The Aerospace & Defense sector operates in one of the most demanding contracting
environments in the world. Working with the U.S. government (especially agencies like the
Department of Defense) requires not only technical expertise and operational excellence but also
a firm grasp of the types of contracts used in federal procurement. Each contract type comes with
its own risk profile, regulatory requirements, pricing mechanisms, and accounting obligations.
This guide provides a practical overview of the major contract types used in A&D government
contracting, along with insights into how a purpose-built ERP like Deltek Costpoint supports
effective management and maintains compliance for each.

Before addressing each of the contract types, it is important to first understand the risk inherent to all government contracts.

Risk in Government Contracting:
In the context of government contracts, risk refers to the potential for loss, non-performance, cost
overruns, legal exposure, or reputational harm that may arise during the execution of a contract
with a government agency (in this case, specifically the DD). These risks can stem from
financial, operational, legal, or compliance-related factors, and they vary depending on the
contract type, scope, terms, and agency involved. These types will be expanded upon later.

Types of Risk in Government Contracts

● Financial Risk
○ Unanticipated costs not reimbursed under fixed-price contracts
○ Inaccurate pricing or bid assumptions
○ Cash flow constraints due to delayed payments

● Performance Risk
○ Failure to deliver on scope, schedule, or quality requirements

Technical or logistical challenges in meeting contract specifications
○ Inability to hire or retain skilled labor

● Compliance Risk
○ Noncompliance with federal regulations such as FAR, DFARS, CAS, or ITAR
○ Inadequate timekeeping or cost allocation practices
○ Data security or CMMC-related violations

● Regulatory and Audit Risk
○ Adverse findings from DCAA, DCMA, or IG audits
○ Disallowed costs or questioned expenses
○ Termination for default or cause

● Reputational Risk
○ Negative outcomes that affect eligibility for future contracts
○ Public scrutiny or whistleblower actions
○ Loss of trust from agency customers or prime contractors

● Legal Risk
○ Contract disputes or claims under the Contract Disputes Act
○ False Claims Act exposure
○ Breach of contract or subcontractor litigation

Risk Allocation by Contract Type
● Fixed-Price Contracts shift most of the risk to the contractor. You must deliver the
project at the agreed-upon price, even if costs rise

● Cost-Reimbursement Contracts shift more risk to the government but increase
compliance burdens and audit exposure.
● Time-and-Materials Contracts involve shared risk but may require careful tracking and
justification of hours and materials.

1. Fixed-Price Contracts
Definition: In a fixed-price contract, the government agrees to pay a set amount for a defined
product or service, regardless of the contractor’s actual costs.
Subtypes:
● Firm-Fixed-Price (FFP): Most common. Contractor bears full risk.
● Fixed-Price Incentive (FPI): Offers incentives for cost savings or performance
milestones.
● Fixed-Price with Economic Price Adjustment (FPEPA): Used when costs are likely to
fluctuate over time (e.g., fuel, metals).
Implications for A&D:  FFP contracts are favored for mature technologies with predictable costs. However, in A&D,
where complexity and long project timelines are common, cost overruns can erode margins
quickly.
How Deltek Costpoint Helps:
● Tracks actual vs. target costs in real-time
● Alerts users to budget deviations early in the project lifecycle
● Supports detailed work breakdown structures (WBS) for high-cost visibility and control

2. Cost-Reimbursement Contracts
Definition: The government reimburses the contractor for allowable costs and typically pays a
fee (fixed or incentive-based) for performance.

Subtypes:
● Cost-Plus-Fixed-Fee (CPFF)
● Cost-Plus-Incentive-Fee (CPIF)
● Cost-Plus-Award-Fee (CPAF)

Implications for A&D:
These contracts are used for high-risk R&D, prototyping, or mission-critical systems where final
cost is uncertain. They shift more risk to the government and demand strong cost control and
audit readiness from the contractor.
How Deltek Costpoint Helps:
● Enforces allowability and allocability rules under FAR and CAS
● Enables rigorous timekeeping and labor cost attribution
● Provides automated indirect cost rate calculations and reallocation

3. Time-and-Materials (T&M) Contracts
Definition: Contractors are paid for labor (at pre-negotiated hourly rates) and materials used,
with limited government oversight of efficiency.
Implications for A&D:
T&M contracts are suitable for short-term technical services, testing, or maintenance. They
carry moderate risk and require vigilant tracking of labor and materials to avoid disputes.
How Deltek Costpoint Helps:
● Facilitates accurate time tracking and labor category classification
● Provides audit trails and labor cost validation
● Supports billing based on approved labor and material rates.

4. Indefinite Delivery Contracts (IDCs)
Definition: Includes IDIQ (Indefinite Delivery/Indefinite Quantity), task order, and delivery
order contracts. These contracts provide flexibility for the government to issue work as needed.
Implications for A&D:
IDCs are commonly used for systems integration, logistics, and sustainment. They require
modular contract management and adaptable resource planning.
How Deltek Costpoint Helps:
● Manages funding and ceiling amounts across multiple task orders
● Tracks costs and performance metrics at both contract and task order levels
● Enables compliance with funding and obligation limits

Managing Risk and Compliance Across Contract Types
Each contract type carries distinct obligations related to billing, reporting, cost accounting, and
compliance. In the A&D space, compliance isn’t just a best practice, it’s essential for contract
retention and audit survival.

Key Regulatory Considerations:
● FAR (Federal Acquisition Regulation)
● CAS (Cost Accounting Standards)
● DFARS clauses (especially for DoD contracts)
● DCAA/GAO audit readiness
● ITAR/EAR compliance for export-controlled technology

Deltek Costpoint’s Edge:
● CAS-compliant cost allocation engine
● DCAA-ready audit documentation and reporting
● Project accounting integrated with procurement, inventory, and manufacturing
● Native support for WAWF (Wide Area Workflow) and other federal invoicing system

● Project accounting integrated with procurement, inventory, and manufacturing
● Native support for WAWF (Wide Area Workflow) and other federal invoicing systems

Concluding Thoughts
Understanding government contract types is fundamental for success in the A&D contracting
world. The ability to execute these contracts efficiently (and stay compliant while doing so) can
be the difference between growing your federal portfolio and losing ground to competitors.
Deltek Costpoint empowers contractors with the tools needed to manage every aspect of contract
performance, whether it be from budgeting and cost control or billing and audit prep, on a single,
integrated platform built for the unique needs of contractors in the A&D industry.