Fixed-Price Contracts In Military Research

The Pentagon has decided to move forward with having fixed-price contracts for new weapon research and development. I have yet to determine if this will apply to manufacture of already widely used weapons as a logical decision would have, or if this only applies to research.

This would make sense if it was for production. You say what you are going to pay for a product and the various companies can "bid" (lower than original price) for the contract. Having a price fix of not having companies come up with their costs first makes sense as a company will always look for a profit.

Now, I know some instantly are thinking "companies are greedy and the government should just tax the profit out of them". Not exactly. With a fixed price before bidding companies would either accept lower bids or lose the business. A government tax on the companies would simply add paperwork that would cost more than this alternative.

My problem, however, is the restriction on research. A fixed contract for research will drive companies away because they will not have the funds they need to achieve results. I would prefer a system where there is a set budget for research, as a whole, possibly divided up based on area of research and tell all companies to come up with a product fitting the required aspects if they want the research fund. A competition with military industries would be beneficial because their incentive would be guaranteed production rights for which they would be given enough profit to overcome the loss of research if they bid appropriately. Overall the government cost would go down, and the military industry would become more efficient and effective. (In other words: no more $500 hammers.)

http://www.reuters.com/article/idUSTRE5BA42720091211