Differences Between a Service and a Product-Based Government Contract.

By Jason WhiteAudio PostFebruary 10, 2022

There are many different types of contracts that the federal government enters into; however, you are most likely to encounter a contract for either goods or services. The difference between a service-based and a product-based government contract is not unlike the differences that exist in the private sector.  A service-based contract is where a service that can be measured in hours worked is provided as the product.  Whereas, a product-based government contract is based on providing a physical asset that has a value that is not measured in hours worked.

As a result of these differences, the government typically structures its contracts for these two types of contracts differently.  A product-based government contract will typically be a “fixed fee” contract.  This means that both parties agree on the quantity of goods, price per unit, total prices, in addition to the terms of payment within the contract.

This contract is simpler than the service-based contract.  However, there are two important elements about a contract for goods that you should be aware of. The first is that the buyer (the federal government) can, and usually do, include terms in the contract that the buyer will conduct a quality inspection before accepting the goods.  Therefore, the seller is under obligation to the buyer until the goods arrive, in good condition, to the buyer.  The second is that sometimes the seller is only responsible for delivering the goods to a third-party carrier, designated by the federal government, and notifying the government that the goods are on their way.  Any damage to the goods in transit is the responsibility of the seller in this arrangement.

The service-based contract can also be a “fixed fee” but is more commonly an “expense-based” contract.  In this type of contract, the contractor passes along the actual cost of materials and goods required for the job.  This pass-through includes labor which can be approximated at the onset of the contract but will likely vary somewhat from the contractor’s estimate used during the bidding process.