Buzz of the Week: McCain and cost-plus contracting

Sen. John McCain (R-Ariz.) clearly touched a nerve in the federal community when he proposed banning the award of cost-plus contracts as a way to trim federal government spending.

The topic came up during the Republican presidential candidate’s Sept. 26 debate with Democratic Sen. Barack Obama when moderator Jim Lehrer asked the candidates how they proposed to cut government spending in the wake of the financial bailout. A switch to fixed-price contracts was one solution he offered.

Based on the letters we received, readers are not impressed with McCain’s acquisition acumen. But the story generated a considerable amount of discussion that had nothing to do with presidential politics.

McCain had echoed a concern often expressed about cost-plus contracting, in which the government pays vendors for the total cost of their work plus an award fee based on meeting contract requirements.
The problem, critics often say, is that a cost-plus arrangement can tempt a company to drive up its costs and work slowly to generate higher payments.

Fixed-price contracting, in theory, avoids that problem. Having agreed to work for a particular price, a company has every incentive to do the job on time and on budget.

But readers, mostly current or former government employees, said it’s not that simple. Each approach has its place, and — here is the important point — neither one works if government does not develop and adhere to a clear set of requirements.

The problem of expanding requirements, known as scope creep, is particularly vexing for a company bidding on a fixed-price contract. A contractor loses money if the requirements increase but the price remains relatively fixed, making the safest course a high bid or no bid at all.

A retired Air Force reader summed it up this way: “I can’t tell you how many times the government has changed or added requirements midstream. The government typically requests a Chevy in the beginning but will add enough bling to make it a Porsche, yet expect to pay the Chevy cost.”

What the people are saying
Here are samples of comments from readers.

  • “Defense contractors have found through the past 20 years that they either have to have a cost-plus or an overfunded firm-fixed price (FFP) contract vehicle for research and development of uniquely military devices, equipment and vehicles. Under FFP, 100 percent of the risk is borne by the contractor. If they have underestimated the task, they bite the bullet; if they have overestimated the task, they reap the benefits.”

  • “By taking cost-plus contracts out of the government’s tool chest, we will leave hundreds of agencies without the necessary resources to get their job done. Cost-plus contracts are necessary tools for agencies that have weak and confusing requirements. Sen. McCain is right when he says that there is waste and overspending with these types of contracts, but I would like to point out that there is an opportunity for abuse in all contract types unless the government invests in skilled program and contract managers.”

  • “Ethical contractors try to help their customers focus of the problem at hand since their own planning depends on knowing what the future may bring. Since neither the contract-awarding agency nor the contract winner knows the future, cost-plus becomes the answer. With the customer invoking the ‘one little (or big) change’ syndrome while the project is under way, the contractor has no choice but to ask for more budget to cover the change order. What else is there to do?”

  • “Cost-plus contracts are a tool that fits better in certain circumstances than fixed-price contracts. Banning cost-plus is like banning wrenches. You could still get work done using pliers and hammers, but it would be cheaper and more effective to use the right tool for the job.”

  • “Removing cost-plus contracts means the government must be responsible for completely developing the requirements and work scope, which will cost money and delay work. It will also result in overall higher costs because contractors, in order to stay healthy, must bid firm fixed-price contracts much differently than other types of contracts.” 

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