Hi Steve,
I tried to post another comment here - http://forums.construx.com/blogs/stevemcc/archive/2007/06/06/estimating-in-an-outsourcing-context.aspx - but that didn't seem to work.
What I wanted to say was that I've found the name for the concept that we discussed in the comments on that page - which was the idea that a competitive market biases customer choice towards bids that are too low. It's called the "Winner's Curse". It turns out to be a real phenomenon, which has been documented in various fields of economic activity for a long time.
Here's a link to the best paper I've been able to find on how it affects software - http://simula.no/research/engineering/publications/Jorgensen.2005.2 . The paper is from the Simula Research Lab in Norway. The page has links to the full article text in both PDF and text format.
Regards,
John Rusk