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>It's disincentivizing cost reductions and incentivizing cost increases. Competetive bids drive costrs down. The alternative to cost plus is? Not having fixed

>It's disincentivizing cost reductions and incentivizing cost increases. 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.

edmundsauto 4y ago
This only works if the bids represent the same work, at the same quality, on the same delivery schedule, with the same feedback pathways and the same risk mitigations. In other words, it is the “spherical cow” of contracting.
- ChrisLomont 4y ago
  >This only works if the bids represent the same work, at the same quality, on the same delivery schedule, with the same feedback pathways and the same risk mitigations. 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.
  - ClumsyPilot 4y ago
    "And how does a company account for risk? 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
zbrozek 4y ago
Cost plus isn't used just at NASA. It's even more evil in other arenas, like electricity in California. Our regulators allow for a fixed profit margin for opex and a higher fixed profit margin for capex. This has the twin effects of running things to failure (and igniting the state) in order to avoid opex and instead claim capex, and also motivating as-high-as-possible costs for everything. No competitive bids are possible.
- jiggawatts 4y ago
  The same madness happens here in Australia too. Just recently I did an IT project for a local electric utility company and they were blowing $200K on firewalls for a system used by 10 people. Similarly they “upgraded” a perfectly good 10 Gbps fixed line to 200 Gbps for the same group of users. They can utilise maybe 1 Gbps on a busy day. They also get a fixed profit ratio relative to capex. So they burn giant piles of money to get their percentage from the government…
  - bcrl 4y ago
    Electric companies tend to be regulated monopolies, and suffer from the same perverse incentives with models like being allowed a 10% profit. The more they spend replacing poles and building new pole lines, the bigger the profit the regulations allow.
downut 4y ago
Wait till you find out about Red and Blue teams submitting bids from the same corporation. I sure loved being a small part of that.
LegitShady 4y ago
>The alternative to cost plus is? 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.
- ChrisLomont 4y ago
  >Contracts where the contracting party agrees to a % of responsibility. 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.
  - LegitShady 4y ago
    >Except no big agency does this because it's a legal nightmare. 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.

edmundsauto 4y ago

This only works if the bids represent the same work, at the same quality, on the same delivery schedule, with the same feedback pathways and the same risk mitigations. In other words, it is the “spherical cow” of contracting.

ChrisLomont 4y ago
>This only works if the bids represent the same work, at the same quality, on the same delivery schedule, with the same feedback pathways and the same risk mitigations. 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.
- ClumsyPilot 4y ago
  "And how does a company account for risk? 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

zbrozek 4y ago

Cost plus isn't used just at NASA. It's even more evil in other arenas, like electricity in California. Our regulators allow for a fixed profit margin for opex and a higher fixed profit margin for capex. This has the twin effects of running things to failure (and igniting the state) in order to avoid opex and instead claim capex, and also motivating as-high-as-possible costs for everything. No competitive bids are possible.

jiggawatts 4y ago
The same madness happens here in Australia too. Just recently I did an IT project for a local electric utility company and they were blowing $200K on firewalls for a system used by 10 people. Similarly they “upgraded” a perfectly good 10 Gbps fixed line to 200 Gbps for the same group of users. They can utilise maybe 1 Gbps on a busy day. They also get a fixed profit ratio relative to capex. So they burn giant piles of money to get their percentage from the government…
- bcrl 4y ago
  Electric companies tend to be regulated monopolies, and suffer from the same perverse incentives with models like being allowed a 10% profit. The more they spend replacing poles and building new pole lines, the bigger the profit the regulations allow.

downut 4y ago

Wait till you find out about Red and Blue teams submitting bids from the same corporation. I sure loved being a small part of that.

LegitShady 4y ago

>The alternative to cost plus is? 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.

ChrisLomont 4y ago
>Contracts where the contracting party agrees to a % of responsibility. 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.
- LegitShady 4y ago
  >Except no big agency does this because it's a legal nightmare. 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.