For companies exploring federal contracting opportunities, cost-reimbursable contracts can be a complex yet appealing option. Cost-reimbursable contracts offer low financial risk but demand high compliance. Learn the basics, understand the tradeoffs, and see how FAR 2.0 may change the game.

What Is a Cost-reimbursable contract?

Cost-reimbursable contracts are a type of government agreement in which the contractor is reimbursed for allowable, allocable, and reasonable costs incurred. Unlike fixed-price contracts, where the contractor bears the majority of the financial risk, cost-reimbursable contracts shift much of that financial risk to the government. In return, contractors agree to undergo extensive oversight and adhere strictly to federal regulations.

There are various types of cost-reimbursable contracts (e.g., cost-plus-fixed-fee, cost-plus-award-fee), but what unites them is a shared structure: contractors recover actual costs incurred while performing the work and earn a pre-negotiated fee for profit.

Risk/reward tradeoffs

Cost-reimbursable contracts can be financially safer for contractors, especially in volatile markets or uncertain project scopes. The government agrees to cover incurred costs up to a ceiling, making these contracts an attractive entry point for complex or labor-intensive work. However, the financial upside can be offset by lower profit or fees. Additionally, if the entities’ compliance structure is not implemented correctly, incurred costs can be disallowed and eat into fee or profit.  

The tradeoff for reduced financial risk is an increase in compliance and operational burden. Contractors must maintain robust systems to segregate allowable costs, track labor by project and labor category, and comply with regulations like FAR Part 31 and, where applicable, Cost Accounting Standards (CAS). In short, while the risk of cost overrun is lower, the risk of audit findings and reputational damage can be higher if compliance is not handled correctly.

Compliance requirements

To participate in cost-reimbursable contracting, contractors must demonstrate that their accounting systems meet government standards before the award. This is assessed through a pre-award accounting system review using Standard Form (SF) 1408. The evaluation considers whether the contractor can:

• Track direct and indirect costs by project
• Separate allowable and unallowable expenses
• Maintain proper timekeeping and labor distribution systems
• Produce accurate and timely incurred cost submissions (often referred to as ICE submissions)

Once a contract is awarded, contractors are expected to maintain a fully compliant system, often subject to post-award audits and annual indirect cost rate proposals (ICPs). These compliance activities require both a strong financial infrastructure and consistent staff training on topics such as allowable costs, timekeeping, and indirect rate management.

FAR 2.0 and the push for efficiency

Recent developments in federal procurement policy have signaled potential shifts in how cost-reimbursable contracts are managed. The introduction of "FAR 2.0" stems from Executive Order 14275, which aims to reduce regulatory burdens and improve efficiency in government acquisition. Updates to various FAR parts are currently under review or have already been issued. Although the full impact is not yet clear, the broader goal is to streamline contract language and make procurement more accessible. Importantly, this modernization effort also reflects a shift in tone from the current administration, emphasizing commercial solutions and cost-effective procurement strategies. Related guidance, such as Executive Order 14271, further emphasizes the Department of Defense's preference for commercially available products over custom-built solutions, adding new scrutiny to non-commercial justifications. While cost-reimbursable contracts remain prevalent, this policy direction may eventually lead to a shift in their use in favor of less burdensome procurement types.

Outlook for contractors

Despite regulatory momentum toward simplification and commercial purchasing, cost-reimbursable contracts remain a significant component of federal acquisition. Many agencies and contracting officers still prefer these arrangements for complex project scopes, especially in defense, healthcare, and research. For businesses new to the government market, the opportunity is clear: access to a multi-trillion-dollar federal marketplace, often with multi-year funding and reliable payments. However, entering this space requires thoughtful preparation and a clear-eyed understanding of the compliance environment. Companies considering cost-reimbursable work should evaluate their accounting systems, indirect rate structures, and policies now before bidding. Setting up compliant systems upfront is far more cost-effective than correcting deficiencies after the award. In today's world, a strong foundation in regulatory compliance proves to be a competitive advantage.