I don’t know what the right method is, but I do know that American military contractors in WW2 used a cost-plus method of compensation. It seemed to work pretty well, but it may be dependent on a level of patriotism that is only present in huge conflicts like WW2.
“ Freedom's Forge: How American Business Produced Victory in World War” goes into detail on the subject:
I agree with your framing of the risk dynamics leading to a preference for cost-plus paradigms. If the buyer (the government in this case) really wanted to enforce to fixed cost system, wouldn't they need a large pool of willing bidders to participate in the process? I work in a high-tech industry, and while there are lots of innovations possible, and there is a need for clear incentives to drive those innovations, I think they could sometimes be too unpredictable for high-tech bidders to consider fixed costs contracts. What if the R&D team finds unexpected and expensive challenges?
Another solution could be to incentivize bidders with bonus rewards or conditional milestones payments, but assure them that a cost-plus approach will prevent unexpected losses. What do you think?
Yes, they would, or else they would have to offer some sort of insuring of risk. It’s a tradeoff, but one which could be estimated. In some cases, it would be worthwhile, but I can’t say anything more than a direction.
Bonuses founder when the innovation can’t be neatly specified in advance. Also making something the default is meaningful.
I don’t know what the right method is, but I do know that American military contractors in WW2 used a cost-plus method of compensation. It seemed to work pretty well, but it may be dependent on a level of patriotism that is only present in huge conflicts like WW2.
“ Freedom's Forge: How American Business Produced Victory in World War” goes into detail on the subject:
https://www.amazon.com/dp/0812982045/
I agree with your framing of the risk dynamics leading to a preference for cost-plus paradigms. If the buyer (the government in this case) really wanted to enforce to fixed cost system, wouldn't they need a large pool of willing bidders to participate in the process? I work in a high-tech industry, and while there are lots of innovations possible, and there is a need for clear incentives to drive those innovations, I think they could sometimes be too unpredictable for high-tech bidders to consider fixed costs contracts. What if the R&D team finds unexpected and expensive challenges?
Another solution could be to incentivize bidders with bonus rewards or conditional milestones payments, but assure them that a cost-plus approach will prevent unexpected losses. What do you think?
Yes, they would, or else they would have to offer some sort of insuring of risk. It’s a tradeoff, but one which could be estimated. In some cases, it would be worthwhile, but I can’t say anything more than a direction.
Bonuses founder when the innovation can’t be neatly specified in advance. Also making something the default is meaningful.