🔷 Cost-Plus

Cost-Plus
Contracting

In recent years, defense tech startups and reformers have pushed fixed-price contracts as the smarter, leaner alternative to traditional cost-plus models.

The pitch: fixed-price is efficient and accountable; cost-plus is outdated, bloated, and ripe for abuse.

Reality is more complicated.

Defined

First, know what the terms mean.

• Fixed-Price Contracts set a price up front, regardless of actual costs—contractors assume the risk.

• Cost-Plus Contracts reimburse allowable costs plus profit—the government assumes most of the risk.

These models differ mainly in how they distribute cost, schedule, and performance risk.

Origins

Cost-plus contracts were created during World War I and became widespread to build the American war machine in World War II.

Back then, urgency trumped everything.

The U.S. needed to scale up defense production rapidly. These contracts let companies take on high-risk, complex projects without fear of bankruptcy—crucial when you need planes, ships, and tanks yesterday.

From Vital to Villain

Wartime cost-plus contracts were essential, but cracks showed fast.

Companies inflated costs, prompting concerns about profiteering.

The Truman Committee, created in 1941 to investigate wartime waste and abuse, saved an estimated $10–15B—several times the cost of the Manhattan Project.

To curb abuse, the government introduced bureaucracy, including detailed cost-tracking, labor audits, and overhead accounting. But that introduced inefficiencies of its own.

Over time, “cost-plus” became shorthand for bloated programs and media scandals.

The Fixed-Price Fix

Cost-plus bad. Fixed-price good.

That’s the pitch from many in the new wave of defense companies and reformers. Their case: it forces efficiency, holds companies accountable, and rewards innovation.

They’re not wrong—but context matters.

Fixed-price works well when you’re dealing with software, production lines, or clearly scoped efforts.

But, it’s a different story for first-of-kind systems with undefined requirements or cutting-edge tech.

Fixed-Price, Real Consequences

Notable fixed-price development contracts include Boeing’s KC-46, T-7, and MQ-25, as well as Lockheed’s Precision Strike Missile (PrSM).

But Boeing’s KC-46, T-7, and MQ-25 have all racked up losses. The KC-46 alone has lost $7B, though one could argue that neither the technology nor the scope was ambitious.

Lockheed Martin's missile and fire control (MFC) business lost $1.4B in 2024 on a program that locked in a fixed price production contract while also developing the system on a cost-plus contract. In other words, the actual price was unknown when they inked the deal—it’s projected to become profitable in 2028.

Is that PRSM? Maybe, maybe not. Lockheed’s public records don’t separate individual programs from MFC reporting, so it's hard to say.

Northrop Grumman’s B-21 bomber, however, is a rare bright spot. It followed a cost-plus development phase with fixed-price production.

Despite a $1.56B hit due to inflation and supply chain issues, the Air Force projects a 28% cost reduction—roughly $5.1B in savings across the first five lots.

The Cost-Plus Case

L3Harris CEO Chris Kubasik put it bluntly in 2023: “I’m not going to bid fixed-price on a development/production program, where we have not agreed on the specs and such.”

And before you think that this is just an evil cost-plus prime contractor saying its bit, know that roughly 70% of all L3Harris work is done via fixed-price contracts.

High-risk, technically ambitious programs are what cost-plus was built for. It gives companies room to experiment without financial ruin—letting them burn down technical risk using government funding.

One recent example is the F-47. Boeing won the cost-plus contract for EMD (Engineering and Manufacturing Development) to build a small number of Y-planes for testing the 6th-gen fighter.

There’s also surprisingly little talk about the Air Force’s CCA Inc 1 program’s contract structure. If Anduril won a fixed-price prototype contract and were allowed to share, one would imagine they would talk about it as much as possible, given their company’s fixed-price narrative.

That said, fixed-price contracts can also create undesirable incentives, leading to scandals of corner-cutting and profiteering.

The Right Tool

Fixed-price makes sense for predictable work. Cost-plus fits when uncertainty is high.

This isn’t a binary choice, though.

Hybrid contracts exist, and often work best.

Contract reform should be about matching the right model to the right job—with solid oversight to ensure neither system gets abused.

As dad says, use the right tool for the job. And measure twice, cut once.

In That Number

73

The Pentagon revealed it took 73 C-17 loads to move 1 Patriot battalion from the Pacific to the Middle East.

TRIVIA

During the US Civil War, the recruitment of huge armies on both sides created an immense demand for uniforms, which some manufacturers struggled to meet. Which company produced uniforms so poorly that they fell apart after a few days or heavy rain, leading to a major scandal?

A) Abercrombie & Fitch
B) Brooks Brothers
C) Levi Strauss & Co.

On the Radar

The UK wants carrier AEW drones. The Royal Navy is looking to replace its carrier-based helicopter airborne early warning (AEW) fleet with something that doesn’t require a catapult or arrestor gear and can remain airborne for 24+ hours.

• The Merge’s Take: General Atomics has no-so-quietly shaped this opportunity for years, and it seems to align almost perfectly with the Grey Eagle STOL variant of the MQ-1C. The Mojave demonstrator, on which the Grey Eagle STOL was based, has already proven it can operate from the UK’s carriers. Competition is limited; the contract will be awarded in January 2027, with completion in May 2032.

   

“Advanced E-7” Wedgetail: The US Air Force plans to buy 26 E-7 Wedgetails to replace the aging E-3 Sentry fleet. The first E-7 prototype will be delivered in 2027, but the service is already looking for “Advanced E-7” upgrades to be fielded in the 2034 timeframe.

• The Merge’s Take: Though the current prototype capabilities are classified, the 737-based E-7 is already a 20-year-old platform, and the Air Force admits it did not get all the tech it wanted in the first batch. The Advanced E-7 prototype plan sounds like the plan to fix that, though by 2034, the service should be looking at a modernized airframe.

   

Those F-47 images are not real, but merely placeholders for the real 6th-gen fighter and should be “taken with a grain of salt,” according to the Air Force.

• The Merge’s Take: Despite all kinds of speculation and analysis on the wing angle, partially masked canards, and speculation over where the engine intakes are, etc., the two-word phrase on the bottom right of the only two images released provides the biggest clue.

They Said It

“Something is not working.”

— Dassault Aviation CEO Éric Trappier on working with Airbus to develop a European sixth-generation fighter jet (Future Combat Air System (FCAS))

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Knowledge Bombs

• The Navy killed the HALO hypersonic anti-ship missile program (LRASM replacement)

• General Atomics revealed the MQ-1C Gray Eagle live-fire demoed shooting down drones using its onboard radar and Hellfire missiles

• Shield AI acquired Crowdbotics’ post-mission analytics tool suite

• Kratos revealed an XQ-58 Valkyrie concept with a landing gear

• Saronic purchased Louisiana shipyard Gulf Craft and revealed its new large Marauder naval drone 

• Dutch F-35s used a Lockheed Martin SkunkWorks comm gateway to enable MADL-based cueing for artillery strikes

• CoAspire successfully test-fired its 3D-printed RAACM cruise missile off a fighter jet

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ANSWER
B. Lacking sufficient material, Brooks Brothers used shoddy, a type of recycled wool made of scraps, sawdust, and glue. The scandal made shoddy a term that is now associated with poor quality goods.