You wrote: "We can cancel this contract and quit paying you money at any time."
That is an incorrect statement. The link below tells you how a DoD contract can be canceled.
http://farsite.hill.af.mil/reghtml/regs/far2afmcfars/fardfar...
If you meet your SoW, you will get paid. The FAR is very, very clear on this issue.
1) All of my resources are committed to the gov and I am not an idiot.
2) This is simply not true. It doesn't matter what flavor of contract you have: time and materials, cost plus fixed fee, etc. You have milestones and deliverables that are defined by your SoW. If you don't meet the milestones, you will not get paid. There is no incentive to "do nothing and wait for the last month of the contract"
3) This is an especially idiotic statement. These are called ECPs, which are a contract mod, which if there are enough of, the contract can get re-competited. Adding ECPs is a very, very bad idea.
You clearly have no idea what you are posting about wrt to gov contracts
Source: I own a small R&D company that works for the DoD and IC