There are Fixed Price Incentive (FPI) contracts that try to address this. Instead of a single price for the contract as in an Firm Fixed Price (FFP) there is a "target" price at which the contractor will get some level of profit. Above that you set a cap on the total cost of a project that you are willing to pay, but the profit of the company goes down as you approach the cost cap. So contractors still have the incentive to minimize cost because if they get cost below the "target" price the contractor still gets that as profit.

However, people aren't usually a fan of them because it requires all of the overhead/audits of a cost-plus contract which typically minimizes how cost effective they can actually be at getting below the target price.

There are also some development-type projects where the government will fund a project, but still require some amount of funds (like 25%) to come from the contractor. But this is really early development type stuff. Basically it is a way to influence where a company is spending their R&D money. Its not really for any operational systems.

Ditch cost plus contracts and use taxes to curb companies that are just profiting off rent-seeking behavior (like sitting on patents). This was done during WWII, marginal tax rates were set to 100% to discourage war profiteering. Companies would still have an incentive to cut costs, to increase profits. But they'd then be incentivized to reinvest those profits because otherwise those profits would be greatly taxed. Granted, how you'd effectively target these taxes outside of unusual circumstances like a world war might be too complicated to be feasible.

This is also the source of the weird health insurance is provided by companies came from. Paying for peoples medical care became an alternative way to compensate people more to avoid absurd taxes. Medical care used to be a lot cheaper so it wasn’t a big expense.

R&D is about managing risk. You can have more micro-managers to ensure that costs are minimized, but the cost of all that management can be more than the abuse of cost-plus (not to mention people hate being micro-manged)

The only good answer I've heard is for the agency to have enough technical experts that they can spot bad things. However that means the government needs to develop technical experts.

> The only good answer I've heard is for the agency to have enough technical experts that they can spot bad things. However that means the government needs to develop technical experts.

It's probably beneficial for the contracted company to have technically inclined individuals in leadership too, ranging all the way from the lowest levels up through CEO. Engineering-minded management is much more likely to spot potential troublemakers and risks for runaway costs in the planning phases where someone with a background in management or finance is more likely to fudge things and say "yes we can do this at X unrealistic low cost" just to win a bid. They're also less likely to make bad calls on how to fix budget problems that crop up midway through the contract.

> There must be some way to structure contracts to allow for cost of developing new technologies

Make companies evaluate and eat the risk by allowing them to set the fixed price...

> yet incentivizes minimizing that cost.

... where they are bidding on the contract against other companies.

This only works if you have a market with multiple players, which is possibly the main reason NASA is more heavily leaning towards fixed-price contracts now.

One simple way is to pay a fixed sum as profit, not a percentage of costs.

minimizing total cost yes, but bidding wars on contract by contract leads to bad outcomes because the incentive is against doing the what is needed until its too late

its better to have trusted suppliers and relationships that lead to long term waste (cost) reductions and quality output (you know your client and your client knows you)

deming said it better than i can: https://deming.org/minimize-total-cost/