RE: government contracting system known as "cost plus"

From: Dickey, Michael F (
Date: Tue Jan 15 2002 - 14:29:04 MST

-----Original Message-----
From: James Rogers []
Sent: Tuesday, January 15, 2002 2:00 PM
Subject: Re: government contracting system known as "cost plus"

Thanks James, you provided a good wealth of information on the subject. It
seems though, from your description, that the only place it would be usefull
is when the project is open ended. Otherwise it seems to have the incentive
to make projects take longer, cost more, and be more innefecient. The
author, Robert Zubrin, for those not familiar with him, is the founder of
the Mars Society and the inventor (I think) of the solar magnetic sail.
This chapter was mainly relaying some of the reasons why we are using 30
year old rocket engines and why access to space remains so expensive. There
may be other applications where a "cost plus" system is better, but that
doesnt seem to be the case in the instance of expendable launch systems or
re-usable launch systems, for that matter. What do you think? It seems to
me that the Titan and Atlas launch systems have been the same for the past
30 years, if that is the case, a 'how much can you make the Titan for' may
be a good typical competition based contract. If the government expended
resources on making sure the vehicles are built to Spec and persue legal
actions if it isnt, it seems they would save more money in the long run, and
we would all have cheaper access to space.

On 1/15/02 10:23 AM, "Dickey, Michael F"
<> wrote:
> Cost plus
> "Beyond These considerations stands the government contracting system,
> 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
> 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
> 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)
> those costs as profit. This system has served to multiple the costs of
> government contracting tremendously, so much so that it has produced
> 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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