You're leaving out a significant factor in cost-plus contracts in their favour: the buyer pays the actual cost, not the cost-plus-contingency that's built into fixed price contracts. It may not work out that way for the reasons you mention, but the problem of baking in risk costs to fixed priced bids returns. And in observing "how does the contractor increase profits", another issue with fixed price bids is that it encourages corner-cutting internally: anywhere the contractor can save money, it goes into their pocket, which can mean a lot of tissue-thin requirements fulfillment that goes wrong later.