There is an incentive, at least in the short run, for suppliers to be inefficient in cost-based contracts because they are rewarded with higher prices.

Question

Quizplus · Accepted Answer

Cost-based contracts typically involve reimbursement of actual costs incurred by the supplier plus a profit margin, meaning that suppliers have an incentive to inflate their costs in order to receive higher prices. This can lead to inefficiencies and higher costs for the client.

There Is an Incentive, at Least in the Short Run