Cost-Plus Contracting

Cost-plus contracting is load-bearing for the procurement-incentives argument that threads through Kyle’s defense-tech and healthcare reading. In Skunk Works, it sits at the center of the Robert McNamara inflection point: Kyle’s note explicitly draws the line from Henry Ford — “one of the first companies to experiment with cost-plus contracting in WWII” — to McNamara, who came from Ford and brought a slashing cost-control philosophy (“Mac the Knife”) to the Pentagon. Kelly Johnson’s premium, revolutionary programs (the Blackbird, energy bombs) were “doomed to fail in the McNamara age of cost control,” and Kyle uses the episode to connect Ford’s procurement lineage to McNamara’s worldview.

In Catastrophic Care, David Goldhill supplies the parallel from healthcare: cost-plus pricing is inherently inflationary because providers paid on a cost-plus basis “prefer to use expensive drugs rather than cheaper ones” — his dialysis example has clinics ordering a $4,100/year injected drug over an identical $450/year oral one because they can bill the government for the wastage. Across both books the through-line is Incentives: paying a fixed margin on top of whatever is spent rewards spending more rather than delivering value, the opposite of the discipline that fixed-price contracting or genuine market competition would impose.

Context: A cost-plus contract reimburses the seller for all allowed costs plus an additional payment (a fixed fee or a percentage of costs) as profit. Common in government defense and R&D procurement where total cost is hard to predict, it shifts cost risk to the buyer and is widely criticized for weakening the contractor’s incentive to control spending — contrasted with fixed-price contracting, which places that risk on the seller.

Where this appears

• Skunk Works — the Ford-to-McNamara cost-plus lineage; premium innovation “doomed to fail in the McNamara age of cost control”
• Catastrophic Care — cost-plus pricing as inherently inflationary (the dialysis-drug example)
• Henry Ford — flagged as an early experimenter with cost-plus contracting in WWII, the root of McNamara’s philosophy