> In theory the regulating agency overseeing the cost plus contract is supposed to scrutinize the expenses of the overseen entity to prevent this

The entire point of getting the private sector is that their insentive should be to do it in the most efficient manner possible, and noone has to manage them - the inefficient ones just die out.

The second-best approach is to have the government manage the whole thing, where they have no real incentive to be efficient.

But what we have here is employing the private sector and incentivising them to be as inefficient as possible, and the government must still hire an army of accountants and experts to keep them in check. it's combines the worst aspects of both!