In the government agency where I work, $200k would actually be considered very reasonable for a steaming pile of shit. We've paid many times that amount and sometimes the shit wasn't even lukewarm, let alone steaming. Believe it or not, we often spend $150 to $200k or more just to make the decision about whether or not we're going to invest in a particular pile of shit.
A lot of government agencies, as well as groups within large companies, want to keep their budgets (or increase them), so there isn't an incentive to be cost effective -- as you mentioned.
But, as another person commented, the overhead around government projects (documentation, reports, meetings, etc) will bloat things beyond a simple time/materials development contract.
The FBO has a site listing the contacts, but there are actually some pretty interesting projects that pop up to be bid upon. Only downside for someone new to the process (or a small shop) is that the big boys (SAIC, etc) have this part pretty streamlined as well as sometimes having in's with the agency requesting the proposal.
Yeah the same happens within any large organization - universities are one example I am familiar with. If you get a large grant from NIH or NSF or whoever, you don't have any incentive to minimize expenses because you don't benefit in any way from spending less than your budget.
So typically people will order the most expensive things that can fit within the budget or even buy stuff they don't need just to spend all the money.
This does strike me as often wasteful but I don't see an easy fix.
