Cost-Plus-Fixed-Fee (CPFF) Contract — Revenue Recognition as Costs Are Incurred
Recording revenue on a CPFF government contract — where the contractor is reimbursed for all allowable costs plus a negotiated fixed fee, with revenue recognized using the cost-to-cost input method.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Contract Asset — Unbilled Receivable (CPFF — Costs Incurred + Fee Earned) | Asset (+) | 18,500,000.00 | - |
| Revenue — CPFF Contract (Cost-to-Cost Input Method) | Revenue (+) | - | 18,500,000.00 |
💡 Accountant's Note
A Cost-Plus-Fixed-Fee (CPFF) contract is the most common defense research and development contract structure. The government reimburses all allowable, allocable, and reasonable costs (as defined in FAR Part 31) plus a fixed fee negotiated at contract award (typically 7–15% of estimated cost). Revenue recognition under ASC 606: the CPFF contract is a single performance obligation satisfied over time — the contractor transfers control continuously as work is performed. The cost-to-cost input method: Revenue recognized = (Costs incurred to date / Total estimated costs) × Total contract value (costs + fixed fee). For a $100M CPFF contract with $8M fixed fee: if $18.5M of costs have been incurred out of $92M estimated total costs, revenue = ($18.5M / $92M) × $100M = $20.1M (which includes $1.6M of fee earned ratably with costs). The fixed fee is earned ratably with costs — NOT as a lump sum at contract completion. This is a critical distinction: the fee is recognized proportionally as costs are incurred, not upon final delivery.
Practitioner & Systems Framework
💻 ERP Architecture
Defense contractors use government contracting-specific ERP systems (Deltek Costpoint, SAP for Defense, Oracle Government Financials) that track costs by contract, CLIN (Contract Line Item Number), cost element (labor, fringe, material, ODC, subcontract, overhead, G&A), and performance period. Every cost charged to a government contract must be documented, allocable to that specific contract, and allowable under FAR Part 31. The Estimate at Completion (EAC) is maintained in the system — when the EAC changes, the revenue recognition rate changes prospectively and a cumulative catch-up adjustment is recorded. The contract asset ('unbilled receivable') represents costs incurred plus fee earned but not yet billed to the government — billed when the contractor submits its monthly invoice (usually within 30 days of month-end).
⚠️ Audit Flags
DCAA (Defense Contract Audit Agency) audits CPFF contracts for: (1) cost allowability — were any FAR Part 31 unallowable costs charged to the contract? (2) allocability — is each cost charge reasonable and appropriately allocated to this specific contract? (3) consistency with disclosed accounting practices (CAS). Financial statement auditors test: revenue recognition methodology (cost-to-cost is appropriate for CPFF given continuous transfer of control), EAC reasonableness (does the total cost estimate reflect current conditions?), and unbilled receivable aging (unbilled amounts beyond 90 days may indicate billing issues).
📄 Required Documentation
Contract and all modifications (including Statement of Work, CLIN structure), incurred cost submissions (annual ICS filed with DCAA within 6 months of fiscal year end), indirect rate computations (applied to each contract), EAC documentation by contract, DCAA audit reports, allowability determinations for questioned costs, and billing records (SF 1034 Public Vouchers).
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