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fe a t u r e a r t i c l e 83

A common tenet is that the use of cost-plus contracts contributes to cost overruns in the context of Major Defense Acquisition Programs (MDAPs). Accordingly, policy-makers express a preference for fixed-price contracts as opposed to cost-plus contracts. While fixed-price contracts may be superior in certain scenarios, such scenarios are limited in the MDAP context. We document three potential unintended negative consequences of fixed-price contracts. We argue that the notion that fixed-price contracts are better than cost-plus contracts for limiting cost overruns is misleading.

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