What are the two broad categories of contract types?

The correct answer highlights the two fundamental categories of contract types recognized within federal contracting practices: fixed price and cost reimbursement.

Fixed-price contracts are agreements where the price is set at the outset and does not change, regardless of any changes in the cost of performing the contract. This type of contract provides certainty to both parties regarding costs and encourages the contractor to control costs efficiently, as they bear the risk of any overruns.

On the other hand, cost-reimbursement contracts allow for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts are generally used when uncertainties in contract performance prevent the establishment of fixed prices. They ensure contractors can receive compensation for their costs, fostering an environment for collaboration, especially in research and development or projects with significant uncertainty.

Understanding these two categories is crucial in federal contracting, as they dictate how contracts are structured, the risk-sharing mechanisms involved, and the financial implications for both contractors and government agencies.