Both methods are used widely and a contractor can use different methods for different contracts so long as the facts of each contract warrant the method chosen. Several factors should be considered:

Type of Contract. For cost type contracts, the fact that a fee is paid in addition to costs makes the contract a low risk plus the normal uncertainties associated with estimating costs would suggest the CC method be used. Surveys of publicly traded government contractors indicate that many use the PC method for cost type contracts. Conversely, since fixed price contracts have greater risk of loss and estimates to completions tend to be more accurate suggests the use of PC methods and the same surveys indicate a high use of the PC method for fixed price contracts.

Duration of Contract. The problems associated with income recognition occur primarily with long term contracts while short term contracts rarely present such problems. As a rule of thumb, contracts lasting two or three years should use the CC method while longer term contracts should use the PC method.

Reliability of Cost Estimates. The reliability of cost estimates can vary widely depending on such factors as estimating techniques used, complexity of the contract, scope of work and problems arising during performance. When reasonably reliable estimates are available, the PC method is preferred; otherwise, use the CC method.

Nature of Product or Services. Little experience on producing a particular product or performing a new service or a large project to design, develop or produce a single product can significantly affect ability to estimate costs or riskiness of loss and hence affect the method selected.

{TAG_FORM_TITLE}