Re: government contracting system known as "cost plus"

From: James Rogers (
Date: Tue Jan 15 2002 - 12:00:04 MST

On 1/15/02 10:23 AM, "Dickey, Michael F"
<> wrote:
> Cost plus
> "Beyond These considerations stands the government contracting system, known
> as "cost plus," which has been in place for some time now in the United
> States. According to the people who invented the system, it is essential
> that corporations be prevented from earning excessive profits on government
> contracts. Therefore, rather than negotiate a fixed price for a piece of
> hardware and allow the company to make a large profit or loss on the job
> depending on what its internal costs might be, regulators have demanded that
> the company document its internal costs in detail and then be allowed to
> charge a small fixed percentage fee (genarlly in the 10 percent range) above
> those costs as profit. This system has served to multiple the costs of
> government contracting tremendously, so much so that it has produced public
> scandals when news leaks out thabout the military paying $700 for a hammer
> or a toilet seat cover.

There are a number of different contract structures used by the government,
and Lockheed uses all of them. There is cost plus incentive fee (a hybrid
between cost plus fixed price and cost plus percentage profit), cost plus
fixed price (where the profit is negotiated independent of cost), cost plus
percentage profit, and firm fixed price being among the most common. At
Lockheed, most of the military contracts where either cost plus fixed price
or cost plus percentage profit (which was usually around 7-8%, not 10%).
For science contracts, it was frequently firm fixed price contracts.
Government regulation controls a lot of the details of what is used where
and for how much money.

The value of the "percentage profit" model is that it can be used for
somewhat open-ended projects e.g. projects where substantial engineering
research may need to be done before a solution will be found. For bleeding
edge military development projects, this is almost always used as the total
cost of the project is not reasonably estimable many times, particularly
when the project requires the development of technologies that effectively
don't exist yet.

As for the amount of personnel overhead, anyone that has done business with
the government knows that government contracts require ridiculous amounts of
personnel overhead to administer. The regulatory requirements for doing
business with the government and filing paperwork far exceed anything that
is practiced in the private sector. For large projects, you effectively
need hundreds of additional people for government contracts that you
wouldn't need for private contracts. Which just reinforces the beliefs of
many on this list regarding the efficiency of government.

-James Rogers

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