That’s exactly how it works, look at contract government salaries compared to anything in the private sector. They charge the government more as rates “go up”, but that certainly isn’t passed along. If large contracting companies really offered value to the government _and_ kept up with market rates for their employees, the state of federal software wouldn’t be what it is today.

I rejected the idea that the consultancy would get a rate increase based on "market rates being higher" and then just capture it all - in my (admittedly somewhat limited and path dependent) experience that just isn't how it works. It's more like we pay randmeerkat $X, we bill them out at $X * factor + overhead. "Market forces" mean we have to go Y > X in renewal or we will lose randmeerkat & friends, so now they get $Y and we bill $Y * factor + overhead. It's of course usually more complicated in general, and overhead especially likely isn't that simple.

Nowhere in there is the assertion that X or Y is what randmeerkat would get on the open market. Importantly, their market isn't really "programmers", but "programmers that work in govt + contracting halo". Which is part of why the idea: I could get $N more in SF tech may be compelling for you, but isn't compelling for them (unless too many people actually make that change, instead of just talk about it).

Also there are many other ways they can raise there rates, but if the claim is that it is due to market on the developer salaries that are going to be a line item, there is going to be at least first pass look at a) is that true (find some market data and wave hands) b) did it actually get spent that way (may come up in an audit).

So the real answer seems to be not "They get more and I get nothing" but "I get a bit more, and they get more scaled by what I get", i.e. "win-win".

There is lots wrong with the system of contracting, but I don't think criticizing a cartoony straw-man of it gets anywhere useful.