I think by "rip-off" he meant the Pentagon pays more than someone paying his own money would pay, and more than a truly free market would allow. He is not claiming that pentagon contractors cheat on contract terms. They don't need to. If the game is rigged in your favor from the start, there is no need to cheat.
Suppose you were looking to buy a house. A builder came to you and offered to build it for his price plus a couple percent. The more you spend, the more he makes. There is no way he can loose money by his own negligence - you pay for his mistakes. If the house actually ends up costing more to build than the builder promised - YOU pay the extra, and the builder gets MORE profit because he gets a percentage of what is spent. The builder has no incentive to minimize his costs. In fact, he has every incentive to take as long as possible and spend as much as possible - provided that you do not give up on building the house. Even then, he will not loose the money you have already spent.
Would you sign such a contract? The Pentagon does, every day. Originally, cost plus contracts were given to preserve our defense industrial base (particularly shipyards) during periods of lower defense spending. There is some justification for them because defense systems do involve more financial risk than building a house. However. it has gotten out of hand. The Pentagon has to spend a lot of money and set up many beaureaucratic controls to minimize the abuse of this kind of contract. Even so, little incentive remains for defense contractors to be creative in devising new military capabilities or in controling costs. The kind of controls that are needed to control the cost-plus system simply cause more delay and expenditure, and stiffle creativity.
The department has made some efforts to reform - by including terms to give companies some incentive to come in on time and under budget, but the "cost plus" contract still rules. That is how government, and government-dependant corperations, spend our money.