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FCW Insider: Is McCain off-base about cost-plus contracts?

Several readers from the Defense Department have responded to our story about McCain and cost-plus contracts.

In case you didn't catch it, during last week's presidential debates, Sen. John McCain said one way the government could save money (in the wake of a $700 billion banking bail out) is by moving from cost-plus to fixed-cost contracts. 

“We need very badly to understand that defense spending is very important and vital, particularly in the new challenges we face in the world, but we have to get a lot of the cost overruns under control,” McCain said (read the FCW story here).

But each of these readers argues that the cost-plus contracting itself is not the problem. The problem, they say, is government's inability to define requirements clearly.

"Cost plus contracts, if properly used, save money," wrote one reader. "If contractors bid on work that is not well defined, but necessary (repairing jet aircraft, when you don't know everything that is broken???), the contractor must cover his cost. If in doubt, he will bid the maximum cost possible… Senator McCain is correct to challenge misuse of cost-plus contracts, but we all should challenge any misuse of any type contract."

Another reader digs deeper:

"Back in the mid-80's Washington was up in arms over spiraling program costs. Their solution was to outlaw cost-plus contracts and require only fixed-price contracts. Didn't work then and won't work now because the type of contract (pricing agreement) is NOT the problem. Contract pricing is a function of the customer's ability to define the requirement. This ability to define the requirement directly establishes the contractor's ability to project the risk of performance under the contract. The less we (the government) are able to define the requirement the more risk the contractor assumes with respect to performance. More risk = more profit." (Read the full letter here.)

What do you think? Send a letter to the editor or post a comment on this blog.

I will highlight more letters/comments in the days ahead.

Posted by John Stein Monroe on Sep 30, 2008 at 12:17 PM

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Reader comments

Wed, Oct 1, 2008 Alberta Boss

Cost Plus (CPFF) contracts ARE a PART of the problem. I have worked and bid many as a contractor. Contractors love CPFF contracts because they allow recovery of profit on ALL costs, even when the costs are associated with or caused by contractor inefficiency or error. Every dollar spend gets charged to the government with a specified percentage of profit, even if the dollar spent was wasteful. A CPFF contract saves money ONLY when the government can provide successful oversight sufficient to prevent wasteful, erronious and fraudulent charges from being billed. This is something that is next to impossible for the Government to do.Albert

Wed, Oct 1, 2008 Shep Claremont

Incredible! Whoever is advising McCain on this issue is either dumb as dirt or has no knowledge about government procurement. Anyone who suggests that we should either use only one way to buy things or to eliminate a tool completely from our toolbox is equally ignorant about government procurement. Cost plus contracts are not evil or bad in and of themselves. Used correctly they actually save the government money and increase competition to provide goods and services to the government. Used incorrectly, they can cost a fortune and the government can wind-up with nothing to show for its effort. The real problem that McCain should address, I hope his advisors read this, is that we need more trained and equipped contracting and program management professionals. They need to be supported with electronic systems that are integrated and they need to listen to the words of Secretary Gates who only recently reported on what the real problem is with DoD Procurement.McCain did lead an effort to undo a bad deal for the government, but he never bothered to peel back the onion to find the root cause of the problem and now, to propose the elimination of cost plus contracting, is just absurd.

Wed, Oct 1, 2008 Roger Rocket

The Government creates the environment for contracting from regulations to proposal award and contract management. Government contract officers are not up to the job in many cases; I believe that most issues arise from the lack of detail in the proposal perhaps from a lack of experience and a lack of understanding about how contracting firms work.

Wed, Oct 1, 2008 Joseph Petrillo

I agree with the prior commenters that cost-plus contracts, per se, aren't the problem. In fact, it is impractical to outlaw them. A better question is whether we can, and should, have fewer cost-plus contracts. For instance, are these contracts used to avoid having to define requirements? As a general proposition, better-defined requirements should mean more efficient contracts, regardless of the pricing method (cost plus or fixed-price).

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