We examine whether contractors with cost plus contracts earn a higher profit, and whether the higher profit is associated with cost shifting, using a unique set of data of federal procurement contracts between the years 2005 and 2010. Prior research often examines government contractor profitability without differentiating the contract types, which determines the contractor’s ability to cost-shift. We identify firms that are awarded cost plus contracts in some years but not in other years. We find their profitability significantly increases during the years with cost plus contracts. We also find that these firms exhibit greater discretionary expenditures during the years with cost plus contracts, relative to the years without, which is consistent with cost shifting. However, effective monitoring through the Cost Accounting Standards helps to mitigate such behavior. _____________________________ * The authors’ emails are hui.chen@business.uzh.ch and katherine.gunny@colorado.edu. We thank Yonca Ertimur, Bjorn Jorgensen, Steve Rock, and workshop participants at University of Colorado at Boulder for helpful comments. † Corresponding author.