1/09/14 Cost Plus Contracts

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The 2014 budget deal Congress just passed is great for politicians who love to spend money.  But bad for taxpayers who have to foot the bill.

Yet, there’s at least one good provision.  It would cap the contractor compensation levels government will reimburse.

Most of private industry uses fixed-price contracts.  A vendor provides a product or service at an agreed-upon price.  Reached through negotiation.  Or a bidding process.

The federal government spends billions on cost-plus contracts.  The vendor provides a product with the government agreeing to cover the costs to build that product.  With a guaranteed profit amount added in.

Cost-plus contracts contribute to cost-overruns.  How a $6 billion contract can turn into an $11 billion expenditure.  Padding the actual cost of the parts to build a product is what gives us the proverbial $600 hammer.

Among the costs the government reimburses are employee compensation.  This includes salary, bonuses, stock options, and pension contributions.  The current cap is set at more than $950,000.  Per employee.  Contractors can pay employees more.  But the government will only reimburse them up to nearly a million dollars.  Per employee.

The budget deal limits that reimbursement amount at $487,000.

The Washington politician who deserves credit for lobbying for a more reasonable reimbursement is Barack Obama.  Thank you, Mr. President.

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