guest blogger john hare
There have been many comments over the years on many sites about cost plus being used when nobody has any idea of the costs of a project or how to bid it. This morning on Clark’s site spacetransportnews.com he linked to an article claiming that getting bids was so uncertain that contractors would bid 50% higher than it would run to do the same project cost plus to make sure they didn’t lose money. That is an interesting claim. Cost plus is noted for budget over runs while straight bids, honestly enforced, cannot over run as the contractor wouldn’t get paid.
Considering the Constellation mess, wouldn’t it possibly have been cheaper back in 2005 to put the project out for bid? With the current projection of $35B to complete Ares, 50% more would have been a $52.5B bid. If there was that much money on a fixed price contract, how many companies would have been willing to bid on the expectation of making a large profit? How much would they have been willing to cut to get the bid? This is when someone usually points out that there are only one or two companies qualified to bid on such a system. That should be a red flag. If you are specing a system with too few qualified bidders, then you are overspecing more often than not.
Cost plus seems to have a fairly low percentage of profit or even a fixed profit in the contract and requires extensive oversight to keep the contractors honest. I question whether the mandated low percentage itself eliminates potential contractors. Who wants to do a contract with a limit on potential profits when there is other work with much higher margins except the one or the few companies that are set up to do the insane paperwork and deal with the oversight? I think the profit limits in the name of taxpayer cost control end up costing far more than letting companies make higher profits or take their losses. If there were a half dozen or so companies bidding on the Ares, don’t you think it possible that some of them would think they could do the job for far less than $52.5B, or even $35B?
There are companies that are just better at cost control than others just as some people are smarter than others. I don’t think it is out of line to suggest that some companies can execute a rocket project for half of the cost of a competitor. If one qualified company bids $10.00 on a widget and another bids $9.00, go with the lower bid, and don’t pay if they don’t produce. Then if the second company has costs half that of the first, then they spend $4.50 in costs while the first spends $9.00. The second company has profits of 50% of income while the first has 10%. The government attitude seems to be that since this is taxpayer money, excessive profits are harmful to the taxpayer. With this attitude, the more expensive company has the edge since they will make twice as much profit as the better managed one at the same percentage.
If government contracting would quit worrying so much about how much profit a company makes, and start worrying about what is being delivered for the dollar, more companies would try for the contracts. A possible contract with 25-50% profit potential will attract more players. As more players enter a field, some will have better people or ideas which translates to lower costs, which becomes lower bids. When faced with real competition, Lockheed and Boeing can both find cost saving options when it is in their best interest to do so and they can make higher profit margins doing it.
In the long run, competition will cut into the possible profit potential and the end result will be a percentage similar to that mandated in cost plus except on a far lower total price. Financial oversight can be vastly reduced for further savings.
One objection many make is about quality when a simple low bid is the criteria. They believe that low cost is low quality. This has been demonstrated to be false anytime there is a competent purchasing agent involved. If the product doesn’t perform, don’t pay.
Another thing brought up all the time is dishonest contractors when there is no oversight, with the assumption that most contractors will cheat when no one is looking. Thomas Matula says that this is why the government must have a ten page spec for an ashtray. From rotten food to weapons that don’t work to vehicles that don’t run, he suggests that every single one of those specs is required due to suppliers cheating at one time or another. I believe this is a poorly thought out objection. Every single time one of those suppliers cheated, there was a government official not doing his job of confirming an acceptable delivery. It is a matter of historical record that much of the time the particular official was corrupt. You want honest delivery, write a simple spec and have one (1) official responsible for the proper delivery. Responsible includes prison for corruption, which he can share with this supplier.