They also get a fixed profit ratio relative to capex. So they burn giant piles of money to get their percentage from the government…
In other words, it is the “spherical cow” of contracting.
Why would this possibly be true? Two groups can bid on the same project with different tradeoffs. Projects are complex, and there are zillions of tradeoffs to make a competitive bid. The group offering the project then evaluates the bids, often with multiple rounds of feedback.
And generally then these projects initially got to several competitors, with fewer getting follow-on work, causing them all to try really hard to deliver good work.
Future projects are always worth more than current projects, so only an idiot does bad or over-cost work often. Such groups eventually don't get more work.
I've worked on such bids for decades. Multiple groups bid, with a statement of work. The other side evaluates the bids. Cost plus simply allows groups, when bidding to not have to use larger multipliers to mitigate risk, since some of the risk goes to the offeror.
If you were running a company, and you had two ways to bid a contract, firm fixed price vs cost plus, which do you think provides less risk to you?
And how does a company account for risk?
Higher prices, end of story. This is simple economics.
It's why less risk results in smaller margins throughout pretty much all industries. It allows stable planning.
Higher prices, end of story. This is simple economics."
The job of the company is to manage risk of the project they are delivering, and let the ones that do it well win. What the hell is the point of private sector if the taxpayer pics up the tab every time something goes wrong?
I don't know what bids you dealt with, the ones I did looked nothing klike what you describe. For any non-mundane work, that's not like, paving a street, you low-ball the bid, deliver the bare minimum the paperwork allows and then keep milking the government for improvements because what you've delivered is not good enough.
If the bid is about new technology, the tradeoffs cannot be understood by non-experts, and are difficult to pinpoint even for experts. The expertiese required to access how good is the bid is the same as the expertiese needed to design the system -> if you have that expertiese on hand, you would not need to outsource the design.
The process is insanely time intensive, expensive, and difficult to navigate. Not because government is inefficient, but because taht's the nature of new technology.
> Future projects are always worth more than current projects, so only an idiot does bad or over-cost work often. Such groups eventually don't get more work.
In UK Capita get work again and again despite fucking it up all the time
Contracts where the contracting party agrees to a % of responsibility. When the project runs over the profit is reduced by the overrun * the percent responsibility.
Lets say the agreement has 25 million in profit and 40% responsibility. If the project runs over by $2m, the contractor eats $2m * .4 = $800k reduction in profit so now it's $24.2m.
Then they're actually incentivized to not have overruns.
Except no big agency does this because it's a legal nightmare. The others (cost plus and firm fixed) are well explored.
>Then they're actually incentivized to not have overruns.
Everyone has incentives not to overrun - it means you're less likely to get future work, and future work is worth much more than overrunning current work.
agencies are starting to do it more and more often. It won't get explored if people are scared, but it will get explored if people actually want to fix the problems with procurement overruns.
>Everyone has incentives not to overrun
in cost plus your overrun often directly leads to you making more money. So no, not exactly.
>it means you're less likely to get future work, and future work is worth much more than overrunning current work.
Maybe, maybe not. Lots of things have few competitive bidders, or bidders who bid knowing they're going to make overruns and claims to make the contract profitable when their bid never was. it's often called 'buying the job' in other industries.
Competetive bids drive costrs down. The alternative to cost plus is? Not having fixed profit margins, in which case there is still incentives to increase costs.
In both cases the limit to costing is competition and the contracting side.
Another way to think of it is cost plus lowers costs by lowering risk. If the company were on the hook for uncertainty (which is the case on ANY project), then they would have to price that into the original proposal, as would their competitors, ensuring more costs to cover the risk.
By lowering risk to companies, it provides another avenue to lower costs. This happens in lots of markets - look at cost margins where there is volatility versus margins where there is predictability.