The current cost-plus model actually worked pretty well for a time. When it was first introduced defense contractors hadn't figured out how to use the rules to

The current cost-plus model actually worked pretty well for a time. When it was first introduced defense contractors hadn't figured out how to use the rules to their advantage and really it's pretty counter intuitive for a businessperson to try to maximize their costs. But the big historical problem with (2) is that if you give people discretion they can just choose to award the contract to their cousin Joe and end up paying $600 for a $300 trash can. What kept graft in check under the old system was fear of being found out and fear of being fired after embarrassing an elected official who might fear the voters getting angry. In the current system everybody is following the letter of the rules. Boeing has really managed to structure their costs so that they can charge $52k. They really did win the bid according to the rules. The bureaucrats who awarded the contract to Boeing followed the rules. And while elected officials might bitch and moan there's nothing they can do to disrupt the careers of officials who follow the rules - by very intentional design.