Here are some of the findings from an STTR study performed by Geoff Orazem at Federal Foundry and Gene Keselman and Kathryn Person at MIT Mission Innovation X, “DARPA’s Research and Development Automated Profit Incentive Determination RAPID.”
The DoD is using the wrong bait: The DoD uses profit to attract R&D performers and assumes that offering more profit will attract more performers. We found that this assumption is generally incorrect and that R&D companies decide whether to bid based on the opportunity to fund their commercial product development with government money and the chances of follow-on defense sales.
Profit negotiations are business theater: The government and performers know that the profit margin will end up being 8-10%. No vendor to our knowledge has ever walked away from an award over the profit margin.