The Principal-Agent Problem: Why Contingency Fees Corrupt Strategic Alignment in Federal Capture
- Jordan Clayton
- Jun 18
- 4 min read
A resource-constrained technology firm is hitting a wall in the federal market. They have great tech but no traction. Then, a consultant with an impressive Rolodex approaches with a seemingly risk-free proposition:
"No upfront cost. I’ll open doors for you. Just pay me 5% of the win."
To a commercial founder accustomed to sales commissions and affiliate models, this appears to be the perfect alignment of incentives. Payment is contingent on success. There is zero downside risk. It feels like a "no-brainer."
In the federal market, this is a dangerous fallacy.
The "pay-for-success" model is not only strategically bankrupt; it is fraught with existential legal risk. It creates perverse incentives that encourage consultants to gamble with a firm’s resources rather than build a sustainable pipeline. At DualSight, our operational model is built on strategic alignment and retainer-based rigor specifically to counter these transactional hazards.
The Legal Landmine: FAR 3.402
The first punch you won't see coming is regulatory. The Federal Acquisition Regulation (FAR) has a specific rule for this: FAR 3.402, "Contingent Fees."
This rule generally prohibits contingent fee arrangements for soliciting or obtaining government contracts. The policy intent is to prevent "influence peddling" and corruption. The government wants to ensure that contracts are awarded based on merit and value, not because a consultant called in a favor or exerted "improper influence."
While exceptions exist for "bona fide employees" or "bona fide agencies," a consultant operating on a pure success fee treads a remarkably fine legal line.
The Risk: If a competitor protests your award and discovers this fee arrangement, or if the DCAA audits your contract, the government can determine the contract is "tainted."
The Consequence: The penalty is not merely a fine. The government can cancel the award and initiate debarment proceedings against your company. The "no-risk" deal carries the highest possible penalty: corporate death.
The Strategic Hazard: The Proposal Jockey
The deeper, more insidious risk lies in incentive misalignment. This is a classic Principal-Agent problem.
A consultant paid only on a win has zero financial incentive to perform the 18-month "shaping" work required to create a viable opportunity. They are not paid to write white papers, build relationships, or align with the budget cycle. Their business model relies on volume, not precision. This creates the "Proposal Jockey."
The Jockey's Incentive Structure:
Goal: Maximize the number of "shots on goal."
Tactic: Convince the firm to bid on every RFP that remotely matches keywords, regardless of the Probability of Win (Pwin).
The Gamble: They are playing a numbers game with your money. They use your Bid & Proposal (B&P) budget as their lottery ticket. If you lose, they lose nothing but time. If you win, they get a windfall.
The Result: The firm burns engineering hours, capital, and morale responding to "long-shot" RFPs that were already shaped by incumbents. The pipeline becomes clogged with low-probability bids, distracting leadership from the few opportunities they could actually win.
The Strategic Partner: Alignment by Design
Contrast this with the Strategic Partner operating on a retainer model. A retained partner is paid to optimize the firm's long-term success. Their incentive is retention, which requires winning—but winning sustainably.
The Strategist’s Incentive Structure:
Goal: Maximize Pwin and Return on Investment (ROI).
Tactic: Ruthless disqualification. When a $50M RFP drops without prior shaping, the Strategist advises "No Bid."
The Action: They protect the firm's resources. Instead of chasing a lost cause, they direct effort toward shaping a requirement for the next budget cycle (FY28). They execute the unglamorous, non-billable work—white papers, rough order of magnitude (ROM) estimates, and stakeholder briefings—that builds a 90% Pwin opportunity.
The Difference: The Jockey is incentivized to make you bid. The Strategist is incentivized to make you win.
The DualSight Model: Ethical and Operational Rigor
Our retainer-based model is an ethical and strategic choice designed to protect our clients.
1. Compliance & Ethics We charge for legitimate services—strategy, capture management, proposal development, and market intelligence—not for "influence." This protects the integrity of the award and ensures our fees are allowable costs.
2. Strategic Alignment Our incentive is sustainable growth, not a transactional bounty. We are partners in building a business, not brokers closing a deal.
3. Execution & Shaping We are paid to do the hard work that success-fee consultants skip:
Aligning with the PPBE cycle 24 months out.
Building the Compliance Shield (CMMC, DCAA).
Ghostwriting the artifacts that shape the requirement before the RFP is released.
The Choice: A Lottery Ticket or a Business Plan?
The allure of a "no-risk" fee is strong, but in federal contracting, it is a siren song. It leads to legal exposure, wasted B&P budget, and a pipeline full of "hope."
A contingent-fee consultant is a gambler. A strategic partner is an execution engine.
"No risk" usually means "hidden risk." At DualSight, we are selective by design, partnering with firms that understand that winning requires a disciplined campaign, not a lottery ticket. We provide the Strategic Advisory to identify the right targets and the Operational Rigor to execute the shaping campaign that makes winning inevitable.
